11 May 2010, 0326 hrs IST,REUTERS
BRUSSELS: The European Union made a bold, $1 trillion move to stave off the threat of wider debt-crisis contagion, but it went nowhere in resolving the deep political faultlines running through the 27-nation bloc.
Global financial markets and the euro single currency have responded positively to news of the special crisis mechanism, reached after 12 hours of talks in Brussels and involves the EU providing up to 500 billion euros in emergency funds and the IMF 250 billion euros more.
With the European Central Bank also agreeing to buy euro zone government bonds in the open market, the collective impact has been to erect a vast, imposing safety net under the euro area to prevent Greece’s debt crisis spiralling and infecting Portugal, Spain or other EU member states. In the short-term, financial analysts expect the dramatic decision, with its “shock and awe” $1 trillion headline figure, to tame the worst of a crisis that had steadily intensified over the past five months and threatened the global economy.
But it has done nothing to address the political and structural economic differences across the 16-country euro zone, and the broader European Union, which were the kindling that allowed the crisis to ignite in the first place. “What they’ve put in place is a mechanism to react to a crisis,” said Janis Emmanouilidis, a senior analyst at the European Policy Centre, a Brussels think-tank. “That does not mean that they have put in a place a system to coordinate economic policies in the long term, and that is far more important for long-term stability.”
The core of the crisis lies in the high deficit and debt conditions immediately afflicting the likes of Greece, Portugal, Spain and Ireland, as well as the deeper structural economic shortcomings southern European countries have long had. As EU policymakers and German Chancellor Angela Merkel have repeatedly emphasised, the key to the euro zone being able to fend off future crises is getting budget deficits and debt under control while forcing deep-rooted adjustments to those economies that lack competitiveness and are hampered by slow growth. None of those issues are tackled by this $1-trillion fund.
Greece, which has suffered the most in the debt crisis, has had to push through several austerity plans, making promises to cut state pensions, free up labour markets, raise taxes and rid the economy of waste, in order to secure EU bail-out funds — 110 billion euros on top of the 750 billion agreed overnight.
Portugal, Spain, Italy and other euro zone member states will now be under pressure to take similar steps to Greece — however politically unpopular — in order to insulate the region in the long term and remove the need for the emergency funding. But that process, if it happens, will be long and deeply divisive, pitting Germany and its northern euro-zone allies against those countries not seen to be pulling their weight.
The fallout could include social unrest like that in Greece. “There are going to be many years of pain in southern Europe, this is just the beginning,” said Charles Grant, the director of the Centre for European Reform in London.
“The underlying cause of the crisis, which is the lack of competitiveness in the southern European economies, has not gone away. It’s very hard to see how the crisis will lift for up to five years because the competitiveness issue is so serious.’’
More:
http://economictimes.indiatimes.com/news/international-business/Behind-this-crisis-lurks-a-bigger-one/articleshow/5915183.cms
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