The €500bn eurozone stabilisation package agreed in the early hours of Monday, to be topped up by as much as €250bn from the International Monetary Fund, represents the first time since the Greek debt crisis erupted in October that European political leaders have moved decisively ”ahead of the curve”. All along, the only way of calming financial markets was to produce an initiative that would exceed their expectations and convince them that Europe would do whatever was necessary to save its monetary union.
This has now happened, but it is not the end of the story. The emergency plan will be presented in Brussels as a triumph of the European will – and in some respects it is – but the IMF’s participation will be crucial to the plan’s success. One lesson from the crisis is that eurozone authorities on their own lack the credibility to enforce the necessary discipline on countries facing serious public finances problems. IMF involvement is essential. The eurozone’s stability and growth pact continues to look too weak to do the job, whatever reinforced procedures are announced later this week by the European Commission.
The rescue plan deserves praise, but the eurozone’s difficulties, in the form of yawning budget deficits and huge private and public sector debts, have not gone away overnight. Fiscal retrenchment and austerity will still have to be the order of the day for the next three years at least, and it is very much an open question whether governments have the political nerve and the support from their societies to sustain the unpopular policies that will be required.
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