Europe's economist-statesmen cannot fire a silver bullet
- By Sun Lijian
0 Comment(s)
Print
E-mail
Shanghai Daily, December 6, 2011
First, at a time when Western banks are raising their standards of prudential regulation, it will be ever more costly for PIIGS nations to secure credit on the capital market. In the next six to nine months, the PIIGS' debts will come due, raising the question of their solvency.
Will the market spin out of control on fears of defaults, as it had when Lehman Brothers went bust in 2008 and sparked widespread panic? Will British, German and French financial institutions go bankrupt one after another and victimize the global financial system?
Currently it is widely understood that core EU members will not consider letting the PIIGS leave the eurozone. But if EU's resources are stretched too thin, if it is forced to give up rescuing the PIIGS, then even the scenario of only Greece going under would, in my opinion, trigger a cascade effect throughout the eurozone.
Second, even if EU's prosperous members reach a consensus with PIIGS' economist politicians and implement the rescue plan immediately, will its financial scale and scope fall short of expectations? If so, will speculators take a free ride and jeopardize the long-term effect of the plan? After all, the speculative run staged by hedge funds like George Soros' Quantum Fund in 1992 gave most of today's eurozone members a harrowing time.
Last but not least, will the ECB shift away from the common monetary policy targeting inflation? Will it exercise the role of "lender of last resort" like the Bank of England and US Federal Reserve and worry less about its impact on the euro's global position at a time of crisis and market upheavals? Will fiscal overhaul and deeper integration of fiscal policy in the eurozone be bogged down over conflicting interests between big and small nations? Will such rows send dangerous signals that the eurozone is volatile? We do not have easy answers to these questions since there are many uncertainties.
Easy credit and fiscal tightening both will bring about undesirable consequences. The newly anointed PIIGS' leaders have their work cut out for them. They are bound to face enormous domestic pressure. Should they bend to pressure and adopt measures that promise instant benefits, the situation and their ability to manage it will only get worse.
Moreover, economists make decisions based on reason. Politicians rule by appeasing a fickle public. Hence I am skeptical that those economist-statesmen can adapt to their new roles quickly enough.
At the end of the day, it will take more than a few economists to ride out the debt fiasco. Eurozone governments and their people need to agree that only by developing the real economy can growth be created to service debts.
The author is executive vice dean of the School of Economics at Fudan University. Shanghai Daily staff writer Ni Tao translated and edited his article from Chinese.
Go to Forum >>0 Comment(s)