Time to Constrain Government

PALO ALTO –The current financial crisis in Europe providesa unique update to Lenin’s dictum that nothing so destabilizes a country as a run on its currency. In today’s EU, nothing so destabilizes a currency union as a flight from a member’s sovereign debt.

The turmoil from the Greek debt crisis and concern over analogous problems in Ireland, Portugal, Spain, and Italy have spread fears about the stability of European banks, the global financial system, the eurozone, and the global economy. German Chancellor Angela Merkel recently echoed these fears in public and added worries over whether the euro will survive the crisis.

The €750 billion (almost $1 trillion) bailout package from the EU, the European Central Bank, and the International Monetary Fund provided only a brief respite in international markets. This has now given way to a more sober analysis of the crisis and the efficacy of the response.

The bailout is no solution to the fundamental problems that the eurozone confronts; at best, it buys time to spread the inevitable wrenching adjustments over time and across people. And it carries its own serious risks of moral hazard and the loss of the ECB’s credibility and independence.