Europe rewrites its rule book in creating fund to contain financial crisis
Tuesday, May 11, 2010
ATHENS -- The massive emergency fund assembled to defend the value of the euro is backed by a political gamble with an uncertain outcome: that European governments will rewrite a post-World War II social contract that has been generous to workers and retirees but has become increasingly unaffordable for an aging population.
The trillion-dollar program, to be underwritten largely by the 16 nations that use the euro and by the International Monetary Fund, represents a virtual discarding of Europe's rule book.
Under the rescue unveiled early Monday, governments that broke the currency union's spending restrictions are being offered a commitment of solidarity, with weak links such as Greece and Portugal supported by the creditworthiness of Germany's strong economy.
The European Central Bank will act as a bond broker of last resort for troubled European governments, a role so distant from its conservative, inflation-fighting personality that Jean-Claude Trichet, the bank's president, emphasized that the ECB remained "fiercely and totally independent" of political concerns.
The news invigorated investors. U.S. stocks had their best day in more than a year, with the Dow Jones industrial average rising 3.9 percent, the Standard & Poor's 500-stock index 4.4 percent and the Nasdaq composite index 4.8 percent. European stocks, which last week had their worst week in 18 months, soared. The Stoxx Europe 600 index was up 7.2 percent.
And though economists and other analysts generally agreed that the program was necessary to prevent a full-blown financial crisis, they also agreed that it won't work unless European governments follow through on promises to bring down their large deficits and restructure their economies to become more competitive. Otherwise, the "breathing room" created by the new fund will quickly disappear.
Government debt has been flagged by the IMF as a chief risk to economic recovery, particularly in the developed world and in such high-debt emerging economies as Hungary.
"We can't finance our social model anymore -- with 1 percent structural growth we can't play a role in the world," European Council President Herman Van Rompuy said Monday in remarks at the World Economic Forum in Brussels, just hours after European Union finance ministers approved the new program. European growth rates are lagging behind those in the United States and the rest of the world as the recovery takes shape, with Spain and Greece still in recession.
Access to the fund will be conditional: Countries that think they need help will have to show they are willing to make the changes needed to bring their deficits under control, similar to the process Greece went through in arranging a $140 billion bailout.
But the political challenge looms large, cutting to the heart of Europe's postwar identity. Particularly in the south, unions and socialist movements have established generous work rules and social welfare programs.
Greece, for example, is considered by the IMF to be one of the most inefficient economies in Europe because of the patchwork of rules governing its labor markets -- including the public sector's "employment for life" practices; the syndicates that keep control over pharmacies, law offices and other professions; and the array of early-retirement rules that drive up pension costs.
The government is pushing through changes to the pension plan this week, and the unions are gearing up for a fight.