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GHEI: Europe in denial

Time is running out for continent to undertake serious fiscal reform

- The Washington Times - Thursday, June 7, 2012

Time is running out for Europe. As Spain's banking crisis deepens, politicians on the continent remain in denial. The only solutions in their mind involve borrowing or subsidies from German taxpayers. With the International Monetary Fund (IMF) acting as their enabler, Europe's high-debt countries may be able to put off the required reforms, but delaying the inevitable is taking a toll on their economies.

Output is shrinking, unemployment is 11 percent, and factory orders are down. IMF chief Christine Lagarde believes the European Central Bank (ECB) has room to cut rates, but monetary easing doesn't address the fundamental problem that caused the debt crisis: countries living beyond their means. Spain is the immediate concern, but Greece is just a step behind, with elections coming up shortly.

It would take around $100 billion to recapitalize Spanish banks enough to restore stability. Already struggling with a large fiscal deficit, Madrid simply cannot shore up the financial sector on its own. The latest desperate plan is to integrate the banks of the various members of the European Union (EU), cutting the governments out. This banking union would mean stronger, better capitalized institutions would keep the weaker banks afloat instead of having national governments provide direct bailouts. The idea has received an icy reception in Germany, which has the healthiest economy in the region.

That frugal nation realizes it will almost certainly end up paying the bills in a banking union. A leading member of German Chancellor Angela Merkel's coalition dismissed the notion as a "new, admittedly creative, way to tap German solvency." That opposition is good news for Teutonic taxpayers.

To its credit, the ECB has held strong against backdoor attempts to use it for bank bailouts that violate terms of the EU treaties. ECB Chairman Mario Draghi has maintained the interest rate at 1 percent and currently declined to cut it any further. While the ECB is not blameless - it pumped over a trillion euros in the twin three-year loan operations in an effort to maintain liquidity in Europe's financial markets - Mr. Draghi is holding firm against further monetary expansion for now, passing the buck to the national government, where it rightly belongs.

What that means is Spain, Greece, Portugal, Italy, Ireland and even France need to undertake serious reform to pull out of the precarious fiscal positions they are in. Thanks to their lavish welfare states, high taxes and burdensome regulatory frameworks, they spend far more than they take in.

Germany can't bail out all of its profligate neighbors. Perhaps if this crisis forces European governments to concentrate on the need to balance their books, the heavy price that is being paid will do some good.

Nita Ghei is a contributing Opinion writer for The Washington Times.

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