The euro zone is broken. That, at least, is the inevitable conclusion to be drawn from the current crisis in the European monetary union. Only through a series of massive interventions, such as a €110 billion bailout for Greece and a €750 billion package to prop up the euro, has the European Union been able to stave off a Greek default and bring a certain amount of calm to financial markets. And it's still not clear if those measure will even be enough to prevent Greece -- and possibly other euro-zone members -- from facing further finacial crises.
Calls for a fundamental reform of euro zone rules have become louder in recent weeks. Critics say that the current Maastricht Treaty rules, which focus mainly on limiting budget deficits and national debts, do not go far enough. A monetary union requires closer economic and political union, critics say, otherwise differences between the member economies puts a strain on the single currency.
On Wednesday, the European Commission presented a proposal for tighter rules to keep euro-zone members within strict debt and deficit limits and help prevent another crisis like the one in Greece. The Commission wants euro-zone governments to coordinate their budget policies with other members in advance, to prevent overspending. The proposal, which could mean autonomous nations have less control over their own economies, may see finance ministers discussing budget plans with other EU members before they present them to their own national parliaments.
"Coordination of fiscal policy has to be conducted in advance, in order to ensure that national budgets are consistent with the European dimension, that they don't put at risk the stability of the other member states," European Commissioner for Economic and Monetary Affairs Olli Rehn said in a statement.
The plan also calls for the creation of a permanent mechanism for providing financial assistance to cash-strapped euro-zone members. Such a mechanism could eventually replace the €750 billion package that EU finance ministers agreed on earlier this week, European Commission President Jose Manuel Barroso said.
But before they can become law, the new rules must be approved by EU member states. The plan is likely to face opposition from France and Germany, who will not welcome the challenge to their national sovereignty.
Following the German Model
In an interview with the German magazine Die Zeit published Wednesday, Rehn also called for other euro-zone countries to adopt measures similar to Germany's so-called "debt brake." The debt brake or debt ceiling is a 2009 amendment to the German constitution which from 2011 will oblige Berlin to start balancing the budget so that by 2016, the deficit must not amount to more than 0.35 percent of GDP.
On Wednesday, Spain also announced a package of sweeping austerity measures, including a 5 percent cut to salaries in the private sector and reductions in pensions and regional government funding. The measures are part of plans to sort out Spanish finances amid fears the country's economy could be contaminated by the Greek crisis. Madrid wants to reduce the Spanish budget deficit from 11 percent of GDP to 6 percent in 2011. Other euro-zone members will report on their savings plans next Monday, the Financial Times Deutschland reports.
A rare note of optimism in the euro zone's future also sounded Wednesday, when the European Commission said that Estonia could join the single currency in 2011, provided it won the backing of the EU's other members. Rehn said Estonia's membership would send "a strong signal about the euro area."
On Wednesday, German commentators analyze the need for reform of the euro zone. They also stress that the many benefits of the common currency should not be forgotten amid the current hand-wringing.
The business daily Handelsblatt writes:
"The old euro zone is dying. The process of founding the new euro zone is just beginning."
"The old euro zone was based on a fiction, namely that common monetary policy and the deficit rules of the Maastricht treaty would be enough to ensure that individual economies did not diverge too much. But after a few years of convergence, that was all over: The Greeks used cheap interest rates to inflate their public sector, while Spain bet everything on a real estate boom."
"The new euro zone, however, needs to be based on a better and more comprehensive set of rules than the old stability pact. Member states will have to give up some of their sovereignty as a result. Hence the move by European Commissioner Olli Rehn to force euro-zone members to grant other members a say in their budgetary planning is a good first step."
"The greatest danger now is that support for tougher rules will disappear if, in the medium term, the markets show signs of calming down again. But without comprehensive reform of the euro-zone rules, the next crisis will not be long in coming."
The Financial Times Deutschland writes:
"In the medium and long term, it is a completely worthwhile goal to get the euro-zone members' budget deficits and public debt back to levels which are close to the Maastricht criteria. And clearly the EU needs new tools to do so -- that is one of the lessons of the current crisis. Rehn is therefore drawing the correct conclusions when he calls for the European Commission to have greater rights to intervene (in members' budgets) and when he calls for an EU-wide 'debt brake' in line with the German model."
"In the short term, however, the EU should be wary of selling tough austerity measures as the only real remedy to the crisis. In this respect, the euro zone is divided into two parts. Investors have limited confidence in the ability of Greece, Portugal, Spain and Ireland to solve their debt problems on their own. In fact, they need to save now and reduce their budget deficits, in order to win back credibility."
"For the northern euro-zone members though -- most notably Germany and France -- there is no debt crisis waiting around the next corner. They should not, therefore, fall into a fearful cost-cutting panic spurred on by the financial markets. Instead, they should aim to return to within the Maastricht limits through moderate and realistic medium-term plans. Otherwise the EU runs the risk of stifling the economic recovery because of a decline in state spending. And without economic growth, it will be difficult for all the countries involved to reduce their deficits."
The center-left Süddeutsche Zeitung writes:
"The problem with the euro zone is that the potential dangers of the single currency were clear from the start, while, to this day, its achievements have yet to be properly acknowledged. It's true that it is difficult to squeeze such different economies into the corset of a common currency. And what can go wrong in such a process is currently clear."
"The euro's benefits are much harder to ascertain at first glance. They are, however, immense. German companies no longer need to worry that products made by their competitors in France, Spain or Italy will suddenly become cheaper, simply because those countries have devalued their franc, peseta or lira. The euro, together with EU laws, allowed a real single market to be created, with measurable success. In the first 10 years of the euro, the euro-zone countries created on average 1 million new jobs each year -- five times more than the average in previous years."
"Anyone who wants to abolish the currency union -- - either deliberately or because there is no support for the euro-zone members under attack in the international financial markets -- would have to do without all these benefits. Anyone who neglects the monetary union renounces prosperity."
"The basic mistake was to ignore the fact that a common currency requires political unity. The price of that lack of unity is clear at the moment. ( ) A strict corset of regulation must be introduced to ensure that euro-zone members stay the course (in the event of a crisis). Europe's major task over the next few years will be to lay a new foundation for the euro. Otherwise, the monetary union really will break apart."
The conservative Die Welt writes:
"There are many useful ideas in Olli Rehn's paper. The EU economic and monetary affairs commissioner would like to reawaken the original spirit of the Stability and Growth Pact to make it possible to intervene earlier in the budgetary policy of spendthrift countries as well as to increase the penalties for not sticking to the rules."
"All that sounds good, but on the whole, it misses the real problem. Over the past two months, the EU and the euro-zone members have demonstrated two things with deplorable clarity: First, they act too slowly during a crisis, and secondly, they are quick to throw all their principles overboard in an emergency. Bearing those things in mind, it is hard to see how a minor reform of the stability pact, whose rules countries have always ignored anyway, will better protect Europe against future crises."
"The deciding factor lies elsewhere: Europe must quickly make it clear to the rest of the world, and especially to the alleged speculators, that it can enforce the reforms, requirements and penalties which already exist."
The left-leaning Die Tageszeitung writes:
"According to recent surveys, more than half of all Germans want the mark back. That is a dangerous wish, because since its introduction the unloved euro has risen to become the second global reserve currency, next to the dollar. China alone is believed to have accumulated no less than €0.5 trillion in foreign exchange reserves. A deep fall in the value of the euro, or even the collapse of the common currency, would have dangerous and unpredictable consequences for the entire global economy -- and especially for the export-driven German economy."
"Europe must find a way to get Greece's reckless creditors on board. Speculative financial excesses need to be contained using political means; they should also be made unattractive through a transaction tax. Additionally, Europe needs to have a common economic policy, something that is a necessary complement to the single currency. That would include an alignment of tax rates in order to stabilize budgets, measures to reduce inequality between rich and poor and a mechanism to harmonize the different wages, prices and productivity in different countries."