Earlier this month, the German government voted overwhelmingly to back the injection of €440bn into the European Financial Stability Facility: the Eurozone bailout fund. This has come as welcome news to struggling countries; had it been rejected, leaders’ attempts to preserve the Euro would have been thrown into frenzy.
However, there have been concerns that the passing of this motion would be used to justify further expansion of the fund, or an arrangement where Germany, Finland and other wealthy members of the Eurozone would have to shoulder the debts of Italy, Spain and those nations with severe debt problems. These fears were not put to bed by the financial markets, which seemed to share this pessimistic view. However, promoters of the scheme have widely rejected this view, and struggling countries can now look forward to further injections of cash from the wealthier states within the EU.
Some commentators, nonetheless, feel that wealthier nations like Germany should not be forced to pay for the Euro’s continued existence. There are fears that this bailout is just one of several means of “debt pooling.” In other words, all the previous schemes – Eurobonds, a two-trillion Euro EFSF and the ECB guarantee to buy the debts of Spain and Italy – were merely ways of making Germany, Finland and others responsible for the debts of Italy, Portugal and Greece. The Germans continually refuse to agree to this, but their hand is being forced at present.
Many within the Eurozone feel that the only way to protect the sanctity of the common currency is for Germany to saddle the debt of these countries. However, many commentators feel that there is little benefit for Germany to do this. If Germany were to write off Italy’s debts, including those from before the introduction of the Euro, all incentives for fiscal prudency would essentially be eliminated. Germany’s own credit rating would drop, making its own debts increasingly expensive to pay off.
Economists and commentators are bemoaning the lack of intelligence and appropriateness in the EU’s responses to the issue. Indeed, some have gone as far to say that there is a policy vacuum in Europe’s higher echelons. It seems very foolish for the EU’s leaders to continue attempting the same solutions under different guises over and over again.
It would seem Greece and Cyprus are nigh unsalvageable, and their exit from the Euro appears inevitable even as efforts are made to ensure their safety. Ireland and Spain are comparatively safe and may solve their crisis by imposing losses on bank bondholders within their respective countries. Italy and Portugal face problems of growth. To improve their prospects, the EU may need to spend more money in these countries to allow state governments to increase their wealth and pay debts off the backs of their own economies.