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.

6 thoughts on “The EU rescue package is not a long-term solution”

  1. Posted 10/05/2010 at 11:50 | Permalink

    Stockmarkets are not in the least bothered about that – all they care about is that money is being thrown at the problem. This is a huge boost to liquidity, another example of the ‘Greenspan put’, and very positive for economic growth – probably a bit too positive.

  2. Posted 10/05/2010 at 14:30 | Permalink

    […] Arquivado em: Economia,Nanny State Watch,Política,União Europeia — Miguel @ 15:30 Mais um artigo no IEA blog (que com vêm realçar o que já aqui tinha escrito) European leaders have only bought time – the […]

  3. Posted 11/05/2010 at 00:51 | Permalink

    I think they are missing the affect the austerity package will have on the ability to pay back debt. The reduction in demand caused through a tight fiscal policy will reduce the income generated and the expected gdp will not be there. In short the solution has created another problem.

  4. Posted 13/05/2010 at 10:56 | Permalink

    I can’t begin to express how rude it is to coin and to USE such a derogatory acronymic name to design our countries. There is no guarantee that inhabitants of countries wealthier in this time of history would be any superior to others. Careful with hubris!

  5. Posted 17/05/2010 at 10:09 | Permalink

    […] did utter these words, it was just a bluff to get Chancellor Angela Merkel of Germany to sign up to the eurozone rescue plan that was ultimately agreed in the early hours of May […]

  6. Posted 20/01/2012 at 15:36 | Permalink

    Thank God! Somnoee with brains speaks!

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