Tackling Europe's debt crisis
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Greece's debt crisis was a clear warning that European policymakers must not allow public debt to pile up indefinitely. The European Union was right to react decisively to ensure the euro's stability by providing short-term assistance to Greece and establishing the European Financial Stabilization Mechanism. But, while the European Financial Stability Facility is a necessary step toward restoring confidence, the Greek crisis has revealed structural weaknesses of the European Monetary Union's (EMU) fiscal-policy framework that cannot, and should not, be fixed by routinely throwing other countries' money at the problem.
Indeed, I consider the European Financial Stability Facility to be a stopgap measure while we remedy the fundamental shortcomings of the Stability and Growth Pact, whose fiscal rules lack substantive and formal bite both. This is why we need a more effective crisis-prevention and crisis-resolution framework for the eurozone, one that strengthens the pact's preventive and corrective provisions. Sanctions for eurozone countries that seriously infringe EMU rules should take effect more quickly and with less political discretion, and also should be tougher.
Germany and France have proposed stricter rules on borrowing and spending, backed by tough, semi-automatic sanctions for governments that do not comply. Countries that repeatedly ignore recommendations for reducing excessive deficits - and those that manipulate official statistics - should have their EU funds frozen and their voting rights suspended.
Monetary union was intended to be neither a panacea for eurozone countries nor a get-rich scheme for financial speculators. Nor was it meant to be a system of redistribution from richer to poorer countries via cheaper borrowing for governments by means of common Eurobonds or outright fiscal transfers. It won't succeed if some countries persistently run deficits and weaken their competitiveness at the expense of the euro's stability.
EMU was designed to encourage structural reform. Profligate members were supposed to be forced by the Stability and Growth Pact, as well as by their peers, to live within their means and thus strengthen their competitiveness. Instead, Germany's former social-democratic government weakened the pact when doing so was politically convenient, while less competitive eurozone countries allowed wages to rise and the public sector to become bloated, and then looked away as easy credit fueled debt and asset bubbles.
We cannot foster sustainable growth or pre-empt a sovereign-debt crisis in Europe (or anywhere else) by piling up more debt. European countries need to reduce their deficits in a growth-friendly fashion, but reduce them they must.
It can be done: Germany is reducing its debt burden to sustainable levels while strengthening its long-term growth prospects. Its course of pro-growth deficit reduction, together with its suggestions for strengthening Europe's fiscal framework, could serve as a blueprint for European economic governance.
The author is Germany's Federal Minister of Finance.
Project Syndicate.
