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Debt Reckoning for Europe

BOSTON – Saving the euro, say the sages of the global economy, requires radical steps.& The OECD recently called for a large European firewall – a mega-bailout fund for troubled governments and banks. Others argue for integrating taxes and borrowing in the eurozone and shedding weak members, like Greece, that struggle with a strong currency.&

But tall firewalls, fiscal union, or homogeneity of membership are neither necessary nor desirable.& What is needed are mechanisms that recognize and accommodate differences, rather than new top-down efforts to impose uniformity.

All governments, even Germany’s, tend to spend more than they tax, and to hide shortfalls using accounting sleight-of-hand. Treaties alone do not induce fiscal virtue. The expectation that all eurozone countries would obey rules aimed at capping their budget deficits was the common currency’s foundational fantasy.

Countries cannot get overly indebted on their own: excessive borrowing by European governments required lenders who overlooked the fact that sovereign debt is in many ways similar to, and in some cases worse than, unsecured private debt or junk bonds. Governments provide no collateral and offer no covenants to restrain profligacy.& As the Greek debacle has shown, governments do not pay penalties for fraudulent accounting. There is neither a legal process for forcing a state to pay off creditors, nor a legal venue for debt renegotiation.