Illiquid Europe

ROME – Crisis management in the eurozone has clearly failed to restore confidence. Indeed, following each of the six rounds of emergency measures implemented between May 2010 and December 2011, matters took a turn for the worse. Without fail, markets signaled growing doubt: interest-rate spreads over German Bunds increased in Portugal, Ireland, Italy, Spain, and Greece. Even Germany experienced a partial Bund auction failure in November 2011, while France lost its AAA rating from Standard & Poor’s in January 2012.

Germany and other Northern European countries maintain that the culprit is lax fiscal policy and excessive debt accumulation by other eurozone members. Their solution has been to strong-arm European Union countries into adopting strict fiscal governance and enforcement procedures.

As a result, fiscal consolidation and structural reform seem well under way in all of the “sinning” countries. Indeed, the International Monetary Fund now forecasts sovereign-debt stabilization by 2016 throughout the eurozone, except Greece.

Why, then, does every announcement of harsher governance rules merely fuel another round of financial turmoil?