BRUSSELS – Two lessons have emerged from Europe’s financial crisis. First, there is no substitute for timely and coordinated action when the single currency is under pressure. Second, all eurozone countries are effectively in the same boat. If the boat springs a leak, everyone sinks.
A quicker and more concerted response might have limited the fall-out from the crisis, and thus its cost. The European Financial Stabilization Facility (EFSF), hurriedly established in May 2010 in an effort to stop the rot, will shortly be able to call on some €500 billion in the event that any more eurozone countries face serious liquidity problems. And eurozone member states have agreed to perpetuate this financial-stability mechanism from 2013 onwards, and even to amend the Lisbon treaty to avoid any legal ambiguity.
Despite all this, markets remain unconvinced by the eurozone’s shows of solidarity. Greek sovereign debt has been downgraded to below that of Egypt. Portugal has had to ask for assistance from the EFSF and the International Monetary Fund. Irish banks reportedly need an additional €24 billion to stay afloat. And Spain is doing all it can to avoid the contagion.
The irony is that the euro has been a hugely successful project, bringing considerable stability to participating countries. Indeed, without the single currency, many of these countries would have succumbed to a downward spiral of devaluation, default, and recourse to the IMF.