GREECE’S BAILOUT is not working. The euro area’s response to the wider debt crisis is not working. Increasingly, the EU’s policy makers seem unable to work together. The resignation on Friday of Jürgen Stark, one of six members of the European Central Bank’s executive council, sent a tremor through already fragile financial markets.
Dr Stark is the second German to quit the top echelons of the ECB in protest at the emergency measures the bank has been forced to take to prevent a meltdown of the European banking system. His resignation is a further manifestation of growing strains among those at the euro’s helm. This reflects not only different national interests and poor institutional design but also great uncertainty about what measures, if any, can resolve the crisis.
Economic policy-makers, and economists more generally, have been groping in the dark since the financial earthquake of late 2008 changed the economic landscape. Some argue for immediate reductions in public debt. Others say austerity is self-defeating. Some seek more radical actions, such as quantitative easing – or printing money. Others say that such measures have had little effect where they have been tried while yet another grouping – which includes Dr Stark and many of his compatriots – believe printing money to be the ultimate monetary heresy. With those in positions of power taking diametrically opposed views on the conduct of both monetary and fiscal policy, it’s little wonder that the response to date has been muddled and delayed.
Dr Stark’s advice to the Government on Ireland’s fiscal policy, made in an interview with this newspaper immediately before the announcement of his resignation, was to cut the budget deficit faster than required under the terms of the EU-IMF bailout. He noted that Irish public servants were among the best paid in Europe and that their remuneration should be brought into line with that of their counterparts elsewhere. He was more circumspect about social welfare rates, but his comment that they “have to come under scrutiny” leaves little doubt about the direction he believes welfare spending should take. He reaffirmed Frankfurt’s steadfast position that imposing losses on any senior bank bondholders was unacceptable and expressed frustration that the Irish authorities continue to raise the issue.
German impatience has been in evidence elsewhere in recent days. In Berlin, economics minister Philipp Rösler for the first time raised the prospect of withholding bailout funds to Greece even if that meant it defaulting on its sovereign debt. The utterly predictable effects of the comments were to be seen within minutes of financial markets opening yesterday. European banks exposed to Greece suffered further steep falls in their share prices. Germany is playing with fire. Threatening default could cause the sort of panic that policy-makers have spent three years trying to avoid. That is the reason the Government here has been prevented from defaulting on senior bank bonds. If “no default” is the European position, it should be applied consistently.