At this point in the Eurozone crisis, the only responsible thing for European leaders to do is to develop contingency plans that will minimize the economic fallout in Europe when—not if—Greece defaults.
Economic figures released today for the fourth quarter of 2011 paint a bleak picture for the already embattled Eurozone. Italy and the Netherlands, two of the Eurozone’s major economies, have now officially slipped into recession with two consecutive quarters of negative economic growth. For the Eurozone as a whole, economic activity shrunk by 0.3 percent. The Eurozone has narrowly escaped recession with 0.1 percent growth in the third quarter.
In fact, the situation has gotten so bad in Spain that a small town called Salvaterra de Miño, only 75 miles from Madrid, has reintroduced the Paseta, the former Spanish currency.
Over the weekend, the Greek parliament finally approved the austerity package required by the EU—but at great political cost. Six ministers resigned from the fragile coalition government, and protesters have been on the streets rioting ever since. In return for passing the austerity package, the Greeks were hoping to get a €130 billion ($170 billion) bailout from the EU and the International Monetary Fund, in addition to a further write-off worth another €100 billion of debt.
However, Eurozone ministers are still not certain that the Greeks are serious, and an important meeting of Eurozone finance ministers was cancelled at the last minute yesterday. It was then downgraded to a conference call. Laughable if the situation wasn’t so serious. Brussels fiddles while Athens burns—literally.
These recent developments simply add to an already dire situation.
The Czechs and the United Kingdom have wisely decided not to sign up to the so-called fiscal compact—for now. Among other things, the fiscal compact that was agreed to in December will require EU member states to submit their national budgets to Brussels for approval and establish an EU bailout fund. In addition, the EU Commission has proposed a financial transaction tax. This is of particular concern to the British because of its global financial center in London. Politically, Prime Minister David Cameron has shown bold leadership keeping Britain out of this deal.
The president of the European Central Bank, Mario Draghi, described the fiscal compact as the first step toward fiscal union. If it is anything like Draghi describes, then citizens across Europe should be demanding that their national governments give them a popular vote.
The fiscal compact is more of a stay of execution for the Eurozone than it is a solution to the crisis. Even the former president of the EU Commission and architect of the single currency, Jacques Delors, said recently that the Euro was doomed from the start.
We can either have an end to the misery or a misery without end. Only greater economic freedom can revitalize Europe’s ailing economies. European leaders should plan for the inevitable, minimize the economic fallout, and prepare for the Greeks to default.
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