sábado, dezembro 10, 2011

Until Europe Meets Again

Editorial do WSJ

The script could have been written in advance—Europe's leaders, meeting amid market turmoil about the consequences of failure, came together in Brussels Thursday night and Friday, and sure enough, went home declaring victory.

Broadly speaking, German Chancellor Angela Merkel got her way: The latest incarnation of the deal to save the euro involves mostly a promise by everyone to be a little more German about spending, deficits and debt. Most of the details remain to be worked out, but without an amended EU treaty the legal authority for any of it is a loose end.

On the plus side, there is no multitrillion-euro bailout fund (with Germany inevitably paying most of it), and no promise from the European Central Bank to monetize everyone's debt, either directly or laundered through the International Monetary Fund. ECB President Mario Draghi deserves at least some of the credit for upholding the central bank's independence.

Mrs. Merkel's demand of more fiscal discipline is also correct, but an agreement that offers the European Court of Justice as the enforcer is, well, amusing. What court will go toe to toe with Italian or French unions? When German rectitude meets Italian street politics, who do you think will win?

You will also look in vain for any provision addressing Europe's central problem—stagnant economic growth. If you believe, as most Europeans now do, that government spending equals economic growth, then "budget discipline" becomes mainly a bludgeon for enforcing the tax increases needed to chase high levels of spending. This will drive Europe into a long-term austerity trap. Europe needs major spending cuts and entitlement and pension reform. But outside Germany, political leaders are still holding out for an ECB rescue.

The Obama Administration has been especially unhelpful, running a quiet campaign for the ECB to crank up the presses to bail out the spenders and bond-holding banks. This U.S. interference undermines Mrs. Merkel and others seeking fiscal reform while encouraging those who think the ECB is the only way out.

We wish the Germans well in driving a hard bargain in return for writing a big check, but there is a better way. That would be to return to the euro as it was originally conceived: Countries share a currency but are responsible for their own fiscal policies, including the consequences of default.

This would require that France and Germany recapitalize their banks in the event of a major sovereign default. Interest-rate spreads among euro-zone countries would continue to be wider than before the crisis began, perhaps for many years, but this would be its own form of fiscal discipline. Spreads going forward would provide a kind of early-warning system, without the need for a new bureaucracy to enforce discipline.

No one in Europe seems to have the stomach for that. So we are stuck with these summit sequels and the certainty of more uncertainty. Meanwhile, Adam Smith's market discipline will grind on mercilessly to impose its own solution.

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