Post-scriptum: The Euro is Saved but it still Hobbles on One Leg!

One whale of a fund is what it took to rescue the Euro: some €750 billion, nearly a $1 trillion, much more than what the American Government set up through the TARP to rescue Wall Street.

A very respectable amount of money - the level most analysts agreed on - and, not unsurprisingly given its size, it worked!

But if you look at the arrangement more closely, you realize that it's not a fund as such but a rescue mechanism: European governments don't expect (they hope) to have to actually put up the money. And, what is more important, they've given the green light to the European Central Bank to start acting as any central bank worth its name should, i.e. buy up bonds directly on the market to stabilize prices.

Seeing the positive reaction of the markets on Monday was a relief. The problem is that it could be short-lived.


Because the Euro still hobbles along on one leg only. It is still based on the Maastrich Treaty and on unrealistic parameters i.e. pieces of paper, rather than a real pan-European Treasury to prop it up, the way the American Dollar is.

If the European political class had a little courage, it would realize that what needs to be done now is to set up an institutional structure around the mechanism they've agreed on. A structure that would enable a faster response in case of speculative attacks. A structure that in the end, if it were credible enough, would cost a lot less than the €750 billion envisaged by the mechanism they've just agreed on...

Will Europeans have the necessary courage?

What worries me is the grumbling I can hear in the media. A lot of people - respectable economists and conservative politicians - complain that it looks like European Governments have caved in. To save the Euro was ok, they say, but that doesn't mean austerity measures can now be cut back. Of course, they can't. Governments have to learn to balance their budgets, and citizens to tighten their belts. We all agree on that.

But austerity measures shouldn't be pursued at the expense of economic growth. Remember, a healthy economy is what is needed to raise the necessary funds from taxes and eventually balance budgets. But this takes time and time has to be put into the equation. Before raising our arms in despair and calling for more austerity - and run the political risk of general strikes that block the productive machinery, not to mention kill some innocent people as recently happened in Greece - thought should be given to measures that encourage production and raise employment. The International Monetary Fund has learned that lesson after the Asian collapse in the 1990s, and these days it generally tries to accompany its rescue packages with measures to stimulate the economy.

Will our political class follow the IMF example? I hope so. Measures needed to take us out of the Great Recession are just as important as austerity measures, if not more. The only silver lining on a horizon laden with black clouds is that with a weaker Euro, our export industries (including tourism) will fare better.

Let us hope that a weaker Euro will be enough to drag us out of the recession. But it would be nice, wouldn't it, if Euro-zone governments pursued a common economic policy, so that we wouldn't be helplessly tossed about by every speculative attack, like a ship that has lost its sails and compass...