June 19, 2012
Once again good news has had a half-life of less than 24 hours. Just as news of Spain’s bank bailout rallied markets for only a few hours, a Greek election outcome that was as good as could have been hoped did not buoy markets for even a day. There could be no clearer evidence that the current strategy — vowing that the European system will hold, doing the minimum needed to address each crisis as it comes, and pledging at every juncture to build a system that is sound in the long run — has run its course.
And not all problems can be solved. It is not certain that the full repayment of all currently contracted sovereign debts, sustainable growth for all, and the euro zone retaining all of its members will prove feasible. The private sector is making clear that it recognizes this painful reality. Official-sector planning needs to recognize it as well. Outside Europe, even as leaders hope for the best they need to plan for the worst, ensuring adequate liquidity and demand in their economies even if Europe’s situation deteriorates rapidly. The fortification of the International Monetary Fund is a start; policymakers also need to consider national strategies, trade finance and social safety nets.
A euro-zone collapse would be an economic disaster that might define our era. That prospect must focus the minds of all at the G-20 on immediate action. Those outside Europe must persuade Europeans that the rules change when the stakes rise. The European Central Bank’s credibility will mean little if there is no longer a common currency.