Jean Monnet, the father of European integration, once remarked that “Europe will be forged in crises, and will be the sum of the solutions adopted in crises.”
Last Friday’s emergency summit of European Union leaders illustrates his point.
There had been no shortage of posturing. Speaking to her Christian Democrat supporters on Wednesday, German Chancellor Angela Merkel strenuously argued against further financial concessions toward the crisis countries.
Posturing continued through the summit itself, when French President Nicholas Sarkozy berated the new Irish prime minister for that country’s opportunistically low corporate tax rate.
Yet, when faced with the danger that the crisis might again spiral out of control, Merkel, Sarkozy and their fellow European leaders swallowed hard and agreed to politically difficult steps.
They gave Greece a cut in the interest rate on its emergency loan in return for Athens agreeing to sell off additional state assets. Ireland can look forward to the same when it agrees, as it eventually will, to putting its corporate tax rate back on the table.
The European Financial Stability Facility (EFSF) was authorized to purchase the newly-issued bonds of not just Greece and Ireland, but also Portugal and Spain, effectively capping borrowing costs in those countries.
So, kicking and screaming, European leaders have taken a significant further step in EU solidarity. They agreed to provide further support to the public finances of the crisis countries at German and French expense.
But one step will not be enough. Simply reducing interest rates on new borrowing will not solve the problems of the worst-hit countries. Greece’s debt load was already scheduled to rise to 150 percent of gross domestic product (GDP), an unsupportable level.
We learned last week that, as a result of the country’s deep recession, tax revenues are falling short of projections. Lower interest rates or not, Greece’s debts are still going to have to be restructured.
Accomplishing this will require more hard decisions and more concessions from French and German taxpayers. The EFSF will have to be used to provide guarantees for the “discount bonds” that are issued to replace Greece’s existing debt.
Governments will have to pony up funds to recapitalize weak banks so that they can withstand losses from the restructuring.
There will be more histrionics. But, in response to its crisis, Europe will move forward toward deeper integration. The alternative – splintering of the EU and the euro area – is not an option.
The author is Barry Eichengreen is George C. Pardee and Helen N. Pardee Professor of Economics and Political Science at the University of California, Berkeley. His new book is Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System.