The EU rescue package is not a long-term solution
This weekend the EU finance ministers, the EU and the IMF agreed a huge bailout package for the troubled eurozone countries and the single currency. The emergency package comes after international bond and equity markets became nervous about the Greek crisis spreading to other PIIGS countries.
The deal is worth about 500 billion euros; the IMF adds further 250 billion euros. It includes loans and state guarantees. Additionally, the European Central Bank announced today it would buy government bonds in the market, a further step to flood jittery markets with liquidity. Both measures will certainly calm down the markets; that is clearly a benefit of last night’s agreement.
Nevertheless, European leaders have only bought time – the crisis is not over yet. Of course, the governments of PIIGS countries no longer need to borrow money at steadily rising interest rates and the threat of default is off the agenda. However, the problems of high and unsustainable deficits and deteriorated competitiveness in some euro area countries have not diminished.
All countries of the eurozone, especially the PIIGS, still need to cut their huge structural deficits and to reduce their debts. Greece must stick to her austerity measures. The differences in competitiveness and the resulting current account imbalances within the euro area have to be adjusted through greater labour market flexibility. Moreover, the credibility of the ECB to curb inflation needs to be restored after today’s announcement that it will monetise government debts. Unless urgent action is taken to deal with these problems, the crisis could re-emerge in even more dramatic form. It might not be possible to rescue the euro again.