By: Dr. Lynn Reaser
Although hopes were high that Europe would make progress at its summit last week, fears are again rising in financial markets that the plan to impose greater fiscal discipline on Eurozone members may not win approval and that the fund to provide financial assistance will be inadequate.
The solution to Europe’s problems demands two major actions: (1) a fiscal “pact” imposing rules and discipline on member countries to keep their deficits in check and (2) a commitment by the European Central Bank (ECB) to stand as “lender of last resort” to purchase bonds of its members states in need.
Any fiscal pact must demand transparency in the reporting of economic and budget numbers. The threat of real sanctions must also be credible. The primary political objection will be the loss of sovereignty of individual countries as they surrender some control of their governments to a European entity.
The ECB has resisted to this point a policy that would require it to emulate the quantitative easing programs of the U.K. and U.S. (“QE2” most recently in the United States). It has questioned its legal authority and is also concerned about the loss of its political independence. The ECB needs to see clear signs of fiscal discipline before it would consider providing massive assistance on the monetary side.
Europe faces some extremely difficult decisions in the period ahead. The outcome and market’s confidence in the negotiations and actions taken during coming days and weeks will be critical. The world will be watching.