Wednesday, August 22, 2012

Germany Doesn’t Help Europe by Undermining the Euro

by Clive Crook


August 22, 2012

Investors are bracing themselves for yet another euro-area moment of truth. How many does that make?

The European Central Bank’s policy-making body meets Sept. 6 amid speculation that it will try to strengthen the euro system by capping borrowing costs for Spain and other distressed governments. Even as rumors, denials and clarifications swarm around that question, Europe’s finance ministries are also deciding whether to give Greece more time to mend its public finances.

These two issues, Greece’s solvency and the integrity of the euro system, are increasingly being muddled together. That’s dangerous. It’s vital to keep them separate. Europe’s prospects would improve at a stroke if one notion could be stamped out -- that the European Union will ease Greece and other possible defaulters out of the euro system unless they try harder to balance their books.

Greece is still insolvent and in the end another Greek default is probably unavoidable. This needn’t -- and mustn’t -- mean that Greece exits the euro. Another default would be a far smaller setback for Greece and the rest of the system than a Greek exit, and the two outcomes are perfectly separable. Yet ministers and officials keep talking as though one implies the other.


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