Wednesday 22 November 2017

Slow-motion, muddle-through EU policy is going nowhere fast

An austerity plan with no visible exit strategy is not sustainable in the long term, says Colm McCarthy

THE European banking and sovereign debt crises have been feeding on one another since early 2010 and will not be decisively resolved for several years given the political constraints. That is the only sensible conclusion to draw from the proceedings in Brussels last week. The European leaders have even managed to befuddle those trying to keep count of the frequency of summits -- Irish Times reporters gave the number as both 14 and 17 on the main business page on Thursday.

Three critical tasks need to be addressed. Debt-relief measures are required to resolve those countries unlikely to reattain solvency, banks need to be recapitalised and the potentially solvent countries insulated from contagion. Since the architecture of the common currency area has not been designed to ensure financial stability, the prevention of a new crisis, once the current one is resolved, requires long-term changes. The latest Brussels communique offers decisive actions on neither the short- nor long-term problems.

Under all three headings, Thursday's plan will, if executed (by no means assured), do about half of what is needed. The Greek default is too small, so is the bank recapitalisation, and so is the 'firewall' to prevent contagion to the Italian and Spanish bond markets. Reducing Greece's debts from impossible to unsustainable is pointless.

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