Losing the power to self-harm is not a bad thing at all
European Commission proposals to police the fiscal responsibility of every eurozone member are to be welcomed
EUROPE has come horrifyingly close to an economic meltdown of a kind never before experienced in a developed country. By last Friday week, the nightmare scenario of payments systems shutting down and governments being forced to live from hand to mouth, spending only what they can raise in taxes, was plainly visible.
The extraordinary series of measures agreed by finance ministers just six hours before European markets opened on Monday morning has contained that risk (although it has certainly not removed it).
The existence of such a risk and the protracted delay in the policy response must cause every citizen of Europe profound concern.
Many questions now arise. Among the most important are: what is the economic and fiscal outlook for the euro area and its national economies in the short to medium term; and how can the euro be placed on a solid foundation for the long term?
Despite the calming of panic, many serious people believe that the course of budgetary retrenchment being embarked upon by the weaker euro-area countries is destined to fail, for economic and political reasons. The chance of failure is indeed high, but it is not inevitable.
Some commentators suggest that austerity will lead to a self-reinforcing downward cycle towards depression and ultimate default. Although austerity measures have a negative effect on economic growth, there is no hard and fast rule to forecast its magnitude. Moreover, Ireland and Latvia -- two countries that have already experienced massive fiscal tightening -- give reason to believe that such fears may be exaggerated.
A year ago it was common in Ireland to oppose austerity measures on the grounds that the "medicine would kill the patient". One year on, the economy is close to returning to growth, despite the brutal fiscal adjustment and the withering of the once-gargantuan construction industry (neither Greece nor Portugal face the collapse of a massively important sector of their economies).
Latvia, which has suffered an even more severe contraction in its economy and public spending, is also stabilising, with consumer spending, industrial production and exports of goods all up on the end of 2009.
There is also the possibility that radical (and much-needed) reform of the government sector in the Mediterranean countries will convince the private sector that the grasping hand of state will be permanently weakened. This could unleash pent-up investment.
What of the political and social repercussions of the measures? Here again, there is reason to be very concerned, particularly for Greece. Since the crisis erupted in late 2008, many people have predicted that the greatest economic shock in living memory would trigger widespread social upheaval and unleash extremist forces.
But fears of the Thirties repeating themselves have, thus far, proved wrong.
There has been no discernible increase across Europe in support for parties of the extreme left or right; with a few exceptions governments have not been forced from office and where this has happened it has been democratic and street violence has been rare.
This may be because the current crisis takes place against a very different backdrop to the Thirties. Then, in an age before mass prosperity, many if not most people lived at or near subsistence levels. Losing a job could lead to hunger and eviction. Tent cities and soup kitchens were features of that dark decade.
Today, almost no one in Europe is near the breadline and welfare systems provide a valuable safety net. Nearly everyone could survive big hits to their incomes (as many already have). And even if budgetary constraints result in lower welfare payments, there is no question that still-wealthy societies would stop them altogether.
If Europe's societies have thus far proved themselves more capable of wrenching adjustment than might have been thought possible, its union has acted with an incompetence that even its greatest sceptics must be astonished by.
The EU was not built for speed. But, even by its sluggish standards, the handling of this crisis has been appalling. From the February 11 announcement by euro area leaders that a bailout of member countries would take place, it took two full months to put flesh on the bones of the deal. From the moment Greece formally requested a bailout shortly afterwards, on April 23, it took more than two weeks for political leaders to get ahead of the curve as the situation went from alarming to critical.
Even if the panic is not reignited and the weaker economies can recover without default, the euro area's leaders will need to agree fundamental changes to the foundations of the single currency. The 'no-bailout' clause was a cornerstone of the euro. It has now been removed.
At a very minimum, Europe's leaders will have to replace it with the proposals made by the European Commission this week. These proposals envisage the curbing of national governments' freedom to be fiscally reckless. It means participating countries would be obliged to put in place mechanisms to ensure the risk to the public finances be minimised.
Losing the power to self-harm is hardly bad. Being obliged to modernise is good. Going down this path is needed to save the euro and avoid the turmoil that would result. The status quo has failed. There must be change.
Dan O'Brien is a senior editor at the Economist Intelligence Unit. His book 'Ireland, Europe and the World: Writings on a New Century' deals with the issues raised in this article