€750 billion has been pledged to stop Greece defaulting and contagion spreading across Europe. EU Monetary Affairs Commissioner Olli Rehn stated, “The ECB shall defend the Euro whatever it takes”. The aim of this package is to stun markets into a more confident state of mind with regards the euro, preventing an immediate and catastrophic run on the currency and the debt of member states.
The judgement then, as in September 2008 with the vulnerable banks, is that the dangers of doing nothing far outweigh the problems that will result from the long-term debt problems created by acting to secure markets. Whether or not you agree with the judgement in this case depends on the extent to which you are ideologically wedded to the idea of a common currency for Europe. It is not clear, to one sceptical of the idea of the Euro, that the benefits of the single currency merit the enormous amounts of money being deployed to save it.
Indeed, it could be argued that the measures are merely delaying the pain by shifting today’s debt into the future. The package certainly represents a commitment to sustaining the value of the Euro, but contained in this commitment are two large gambles, the costs of which are likely to be paid by Eurozone citizens in the long term.
The first involves the survival of the Euro, which is less than secure at the moment. Once funds of this size are deployed as part of a rescue package, those financing the package are locked into a long-term investment in the health of the Euro. There is a possibility that the current amount, as large as it is, may not be sufficient to secure the safety of the currency, it is certainly not enough to cover the dangers of a large economy such as Spain’s becoming seriously embroiled in a default crisis. In this scenario, the Eurozone countries and ECB would be forced to provide even more funds in order to avoid losing the current investment. In this way, the package commits Eurozone authorities to an open-ended currency sustenance mission, the cost of which is extremely difficult to predict and mitigate.
The second, related gamble is slightly more specific and presents the danger of losses even if the Euro as a currency remains. Loans to at-risk governments, such as Greece and Portugal, have formed a key part of the strategy of the authorities, but these loans are in no way a safe investment. German taxpayers are clearly anxious about this, having displayed their dislike of propping up failing neighbours in recent regional elections. Bonds of the vulnerable countries may never recover their full value, with the associated losses falling squarely on Eurozone citizens.
On the optimistic side, it is comforting to hear finance ministers talking about the overriding importance of deficit reduction as a condition of support. Markets are making gains in reaction to the announced measures; let’s hope, for the sake of everyone, this is a sign of a long-term stabilisation rather than a blip on the course of a massive decline.