Under pressure to take action before the G20 summit this week in the south of France, the leaders of the European Union (EU), led by Germany and France, adopted a set of measures to deal with the Greek debt crisis and the potential Europe-wide debt crisis. These are half-hearted measures that can, at best, provide a breather in a race that is far from having been run. Europe has a long way to go before it can get on top of the crisis and gain control of its destiny. The patchwork solution found last week, in sheer desperation, that few around the world view as an answer to the problem, is nothing but a Greek default dressed up as a German bailout. What this means for the future of European banks with money locked up in Greece, Portugal, Italy, Spain and, dare one say, France remains to be seen. The solution includes a 50 per cent write-down of the Greek debt; a plan to recapitalise banks, which raises more questions than it answers; and more than doubling of the European Financial Stability Facility, though nobody knows who will fund it (Xie-Xie China!). To their credit, Europe’s leaders do not see this solution as making much difference for more than a week since they now want the G20 to rise to the occasion. There is no reason the rest of the world should help Europe till Europe has convincingly helped itself.
What can Europe do to win global confidence in its ability to turn itself around? First, it must accept that its policies of subsidising a high-cost economy must end. For far too long have European governments used public money to benefit private constituencies, ranging from business to farmers to organised labour, and thrusting all manner of non-tariff barriers on the more competitive Asian economies. Second, Europe must either move closer to a political and fiscal union, to enable intra-European transfer of funds, or give up the illusion of a Union and let the nations seek their individual destinies. Both options come with a political price that Europeans must be willing to pay and be seen to be doing so, for the G20 to step in and help. Europeans who seek help from emerging markets do not see the irony: nations with per capita income of less than $5,000 bailing out economies with per capita income of close to $30,000.
The markets have, of course, reacted favourably to the deal — they have no option but to be optimistic. Even a halfway house is a better place to be in when faced with the wrath of the elements. Indeed, the global community as a whole, especially emerging markets like China, Brazil and India, have a stake in European stability and recovery. However, no one can have a stake in Europe higher than Europeans themselves. So, until EU is serious about grappling with the economic, social and political challenges of saving itself, how can it expect the rest of the world to step up to the plate?