Interest rates must go down

As weeks go by with no solution to the underlying problems of the euro zone, it seems ever more obvious that the survival of the single currency depends on a rapid, clear-cut solution to the Greek crisis; on a new focus on the capacities that the bailout fund must have; and on a new economic policy applicable to the whole of the monetary area. On Monday the news that the Greek austerity objectives had not been met, acknowledged by George Papandreou, caused new convulsions in the European stock markets. It was another Black Monday, which, by force of repetition, is now accepted as an inevitable phenomenon. It is urgent, then, that the "troika" enact the procedures required for the new tranches of aid to Greece, and that it be officially accepted that the Greek debt (172.7 percent of GDP in 2012, according to the latest forecasts) requires a substantial haircut. The sooner this disagreeable circumstance is acknowledged, and the problem resolved without a Greek withdrawal from the euro - in spite of the doubts that may assail the EU countries - the better.

The cornerstone of a more aggressive strategy against the financial crisis is that the bailout fund must act as a mechanism of financial stability; that is, it must become a bank, as called for by the next president of the European Central Bank (ECB), Mario Draghi. The changeover in the ECB presidency will be a good time to bring forward the new functions of the fund: an enlargement that almost everyone accepts, but which Germany has been blocking with confused arguments. And it will also be a suitable moment for the outgoing president, Jean-Claude Trichet, to admit past errors and lower interest rates, at least by half a point.

As well as the Greek crisis, the euro zone is facing the risk of recession. Analysts say that right now the probability of recession is higher than 40 percent, and that the only way to reduce this probability is to change the course of monetary policy.

Trichet must already have appreciated that the dollar area is following a monetary and fiscal policy of expansive character, while the pound sterling area is following a contractive fiscal policy and an expansive monetary one; yet the euro zone is still applying a monetary and fiscal self-punishment that is quite unjustified. The contraction imposed by Germany and its satellites is damaging to the growth of economies such as Italy, Spain and the bailout countries; it increases the probability of stagnation or recession in those states; and it deteriorates the quality of their debt. Cutbacks in every area and at all costs amplifies the crisis in the debt markets.

Thus the economic policy of the euro zone must rely on more selective fiscal contraction (adjustment of deficits in those countries that need it, but not in others such as Germany and the Netherlands, so that they can act as driving forces of recovery) and an expansive monetary policy, so as not to increase the difficulties of recovery in economies, which, like that of Spain, are now depressed by the adjustments.