A Long Bleak Winter

http://www.nytimes.com/2012/01/14/op...ref=editorials


EDITORIAL
A Long Bleak Winter
Published: January 13, 2012

The European Central Bank’s cheap lending to euro-area banks may have briefly stabilized the financial markets. But the respite won’t last. The decision by Standard & Poor’s on Friday to downgrade the credit ratings of nine euro-zone countries, including France, Italy and Spain, should remind European leaders that their economic strategy based on austerity for all is just not working.
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Times Topic: European Debt Crisis
After umpteen rescue plans, Europe remains a long way from coming to grips with its mushrooming debt crisis. Greece, which negotiated a second $165 billion bailout plan with its European neighbors in October, is back on the brink of a financial collapse. Even the new technocratic Italian government, appointed in November with strong German backing to execute a policy of fiscal austerity, says it is an illusion to believe the crisis can be overcome through budget cuts alone.

“I cannot have success with my policies if the E.U.’s policies don’t change,” said Prime Minister Mario Monti of Italy in an interview in the German newspaper Die Welt, published on Wednesday.

Without a new infusion of financial assistance, Greece could default on a $19 billion bond payment as soon as March 20. But Angela Merkel, the German chancellor, and Nicolas Sarkozy, the president of France, have warned that Greece will receive additional funds only after it complies with the terms of its agreement. This includes convincing Greece’s private creditors to accept a 50 percent writedown on some $260 billion of debt, and proceeding with draconian budget cuts that have already forced the government to raise tax rates, cut jobs and pensions and slash spending in the middle of a recession.

But debt relief talks have stalled, with hedge funds and other investors that bought the debt from French and German banks holding out for better terms. And Greece can hardly take more austerity. Its economy contracted by 5.5 percent last year, after shrinking more than 3 percent year-over-year in 2009 and 2010.

The economic implosion is preventing the country from meeting its fiscal commitments by reducing tax revenue and increasing expenditures on automatic programs like unemployment insurance. Despite spending cuts, Greece is likely to have a 9.6 percent budget deficit in 2011, half a percentage point above target.

More importantly, austerity is rending Greek society. Unemployment has mushroomed to 18 percent, with enormous social costs like rising homelessness and crime. Imposing further cuts is becoming politically untenable.

It is time to shift course.


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It is time to shift course. Although Greece is a small economy, Europe is in no shape to withstand the financial fallout of a disorderly Greek default, or its abandoning the euro. Greece is likely to need even more money than it has been promised so far. Economists think the 50 percent writedown may not be enough to return Greek debt to manageable levels. What’s more, Greece and its weak neighbors need Europe’s stronger economies, like Germany, to start spending more to help boost their exports.

Germany should realize by now that without growth its beleaguered neighbors will never be able to pay back their debts. Europe’s problems have spiraled so far out of control that no one knows what policy mix will work. What is certain is that a single-minded obsession with austerity will only deepen the crisis.