Monday, March 21, 2011; 8:22 PM
THE EURO is saved - again, probably. Overshadowed by the tragic news from Japan, leaders of 17 countries that use the common European currency have cobbled together the outline of a permanent agreement to stabilize the euro and resolve the debt crisis across the Atlantic. The package appears set for final approval at a summit of the 27-member European Union beginning Thursday.
In February, German Chancellor Angela Merkel and French President Nicolas Sarkozy had unveiled a "competitiveness pact" that demanded additional German-style austerity measures from would-be recipients of a larger German-supplied bailout. But the latest deal appears to expand the rescue fund's lending ability from $350 billion to almost $600 billion - while softening requirements that euro-using countries raise their retirement ages, as Germany has, and end wage indexing, as Germany has. Greece, the weakest of the debt-strapped countries known unkindly as the PIGS (for Portugal, Ireland, Greece and Spain), will get a cheaper interest rate on its current bailout loans and more time to pay them back.
Mr. Sarkozy and Ms. Merkel deserve some praise for having so far maneuvered Europe's convoluted political structures - not to mention their own resistant domestic political parties - with relative success, creating what is now a widespread assumption that the euro, in some manner, will survive. Not too long ago, many in the markets were betting against that outcome.
Still, this latest compromise is far from a cure to Europe's fundamental ills; Jean-Claude Trichet, president of the European Central Bank, called it "not sufficient" to solve the lack of fiscal policy coordination that has always been the euro zone's Achilles' heel. The package does little or nothing about the undercapitalization of banks - mostly German and French - that hold much of the PIGS' sovereign debt.
Instead, Ms. Merkel and Mr. Sarkozy spent the meeting demanding that Ireland raise its low 12.5 percent corporate tax rate, in return for a break on interest rates like the one Greece got. In other words, they want a tiny country to end one of its few competitive advantages in return for the money it needs to pay German and French creditors.
That seems to us a rather raw exercise of power by Berlin and Paris. But Europe's peripheral countries may have to yield to more such strong-arming in return for a grudging but steady drip of financing from the E.U.'s wealthiest members. How long Europe's political cohesion, much less harmony, can endure under these circumstances is anyone's guess.