KEYNES NOT FRIEDMAN

Editorial

Failure of Leadership

No Better in EuropePublished: August 5, 2011

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LinkedinDiggMySpacePermalink. We were hopeful last month that Europe’s leaders had bought themselves and the global economy time to address the fundamental economic problems eroding the finances and credibility of the 17-nation euro zone.



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Editorial: Political Roots in U.S. Economic Crisis (August 6, 2011) As it has turned out, it took less than two weeks for markets to decide that the European Union’s latest debt relief plan was too slow-acting and underfinanced, and still based more on words than on actions.



Europe’s leaders — who wasted more than a year dithering as Greece unraveled — need to urgently mobilize the Continent’s full financial resources to broaden the thin private market for Italian and Spanish bonds. That could help drive down Italian and Spanish borrowing costs so that these much bigger economies will not also be pushed toward catastrophic defaults, bringing many of Europe’s banks down with them.



Even astute crisis management won’t be enough. Europe’s leaders must also face up to the euro zone’s deeper problems, including excessive trade surpluses in Germany and anemic growth prospects almost everywhere else.



July’s debt summit meeting was a more serious effort than past exercises in procrastination and denial. Leaders agreed to add funds to Europe’s bailout agency and gave it new authority to aid vulnerable governments and banks. But they ducked too many issues and left too many blanks to be filled in. The bailout fund will not actually get the new money until later this year and cannot wield its new powers until all 17 euro-zone governments formally approve — normally a lengthy, uncertain process.



Investors and creditors rightly concluded that there is still no European commitment or institution standing between Europe’s troubled economies and default. Republican debt-ceiling antics in the United States further undermined investor confidence in Europe, driving home the sad truth that even countries with strong credit ratings can be driven toward default by shortsighted politicians.



Europe’s leaders must get back to work and finish what they started in July. They must also persuade the European Central Bank to serve as Europe’s unflinching lender of last resort until the bailout fund can take over.



With luck, those steps can buy enough time to put lasting solutions in place. Those must include a substantial write-down of Greece’s existing debt and new fiscal strategies for Greece and other weakened economies emphasizing growth. Austerity isn’t working for these countries, bringing only high unemployment, stagnating growth and deeper indebtedness. And it is not working for countries that embraced it voluntarily, like Britain.



This week’s market upheavals should send a resounding message to politicians on both sides of the Atlantic that shortchanging growth and games of fiscal roulette are a recipe for years of stagnation and needless pain.



A version of this editorial appeared in print on August 6, 2011, on page A16 of the New York edition with the headline: No Better in Europe