European leaders, with some outside help, have finally moved decisively to deal with the debt crisis that was rapidly spreading from Greece to the rest of the world. The measures announced last night make sense and should restore calm to global financial markets — for now, at least.
The extraordinary steps agreed to by the 16 nations that use the euro are reminiscent of the emergency measures that the U.S. Federal Reserve and Treasury implemented when our own financial markets seized up late in 2008. Euro zone countries are putting up €500 billion in loans or loan guarantees for members that are unable to get financing elsewhere. The International Monetary Fund, in which the United States is the largest player with about a 20 percent share, is putting up another €250 billion. The combined package is worth nearly $1 trillion.
But there’s more. The U.S. central bank reinstated an unlimited swap line with its counterparts in euro countries, the United Kingdom and Switzerland, which will allow those countries to supply their banking systems with as many dollars as they need. Such swap lines were an important tool for keeping commerce moving amid the credit crisis 18 months ago.
The European Central Bank is doing its part by pledging to purchase government and private debt in euro countries, thus stepping in when other lenders might be frightened away by runaway spending, rampant tax cheating, bogus statistics and civil unrest.
Those conditions already prevail in Greece. Lenders have become increasingly skittish of Portugal, Ireland and Spain, all of which have their own fiscal problems, causing borrowing costs for those nations’ governments to rise.
The ECB’s bond purchases are to be “sterilized” by withdrawing an offsetting amount of euros elsewhere from the financial system, lest a flood of new money trigger inflation. This condition probably was a non-negotiable demand by inflation-phobic German monetary authorities.
In theory, all of the new lending between European governments is supposed to be voluntary. Although the ECB provides euro nations with a central monetary authority, European governments jealously guard their national powers to tax their own citizens and control their own treasuries.
But last night’s announcement sends a message that the euro nations finally are accepting the reality that their joint currency binds their interests as closely as those of fellow passengers in a lifeboat. If one part of the boat sinks, everyone is going to get wet, and drowning will be a distinct possibility.
I expect to hear some political bleating in this country about the fact that, through its role in the I.M.F., the United States is indirectly helping to bail out Greece and the euro countries, as well as the international banks (mostly French and German institutions) that hold Greek bonds.
After all, banker-bashing has become a popular sport in Washington now that the fear of financial catastrophe has receded. Such bashing reached a new high (or low, in my view) last month, with a Senate show trial in which Goldman Sachs was vilified for not being stupid enough to lose vast sums in the housing bubble, like so many of its peers.
Memo to Congress, the Obama administration and voters in the upcoming elections: Although banks and investors will inevitably benefit when financial conditions return to normal, nobody is taking these steps to “bail out” big institutions. Governments are acting because the only other option is to do little or nothing, and thereby risk a major recession that will bring needless misery to millions of people.
The financial markets are likely to breathe a sigh of relief over the new European pledge of mutual responsibility. The next question is whether this means the problem is solved.
The answer is of course not. The underlying issue in Greece, in much of the rest of Europe, and for that matter in many U.S. states and in the U.S. federal government itself, is the tendency of elected officials to spend more than their voters are willing to pay in taxes, and to bridge the gap with borrowing that pushes the day of reckoning into the future. When the future finally arrives, things get messy in a hurry.
There are only four ways out of the problem, and none of them are pleasant. Governments that can no longer borrow to meet their spending needs must cut spending, raise taxes, break promises to creditors such as lenders and retirees, or print money to inflate and devalue their way out of trouble. Euro nations, locked in a common currency, do not even have the last option.
So last night’s announcement, substantial as it was, is still only a temporary fix. There are no details yet about how Europe’s governments are going to fix their long-term financial problems. Unless those 16 nations apply enough peer pressure to get everyone to act more responsibly in the future, and unless elected officials elsewhere draw the right lessons from Europe’s difficulties, we are destined to see another crisis somewhere down the line.