FINANCIAL TIMES: You can't rape the Irish now and expect them to be up for sex in a couple of years

Missing the target
Published: March 11 2011 22:37 | Last updated: March 11 2011 22:37
Friday’s summit of eurozone leaders resembled a darts game in which the 17 players aimed at the board’s lowest numbers rather than scoring the bull’s-eye needed to overcome the region’s debt crisis. It focused on proposals to tighten fiscal discipline, raise competitiveness and enhance economic policy co-ordination. It had little or nothing to say about the weakness of Europe’s banks and the spectacular misallocation of capital by the private sector that contributed to the crisis. With the eurozone’s most vulnerable nations once more under siege this week in bond markets, the summit looks dangerously like a wasted opportunity.

The clearest message was that Germany and a handful of like-minded creditor countries are determined to foist their narrow recipes for reform upon troubled “peripheral” nations such as Greece, Ireland and Portugal. The German-led group wants its pound of flesh in the form of more austerity, the adoption of binding fiscal rules at national level, and an overhaul of state pension systems and labour markets. Such actions are a precondition for German agreement to expand the size of the European financial stability facility, the eurozone’s emergency fund, and perhaps to soften the terms of last year’s Greek and Irish rescue packages.

It is undeniable that struggling eurozone countries need to liberalise inflexible job markets, introduce more competition into the services sector and increase productivity. Better management of the public finances would also be welcome. But imagine if all eurozone states had virtuously obeyed the rules of the European Union’s stability and growth pact between 1999 and 2009 and, furthermore, had implemented all the recommendations of the EU’s infamous Lisbon agenda for competitiveness. Would this have prevented the debt crisis? Emphatically not.

Eurozone policymakers are still reluctant to concede that the origins of the debt crisis lie not just in the policy errors of Irish and southern European governments, but in the willingness of banks, in Germany and other “core” countries as much as in the “peripherals”, to engage in reckless lending and dodgy investments. Now market fears about the banking sector are stoking fears about eurozone sovereign debt. European leaders cannot afford to pretend much longer that all will be well with a bit more belt-tightening and a set of fiscal rules that lack credible enforcement mechanisms. The EU’s next summit, on March 24-25, will have to do much better.