The new round of bailouts

Reality is now revealing certain errors more clearly than any doctrine could ever do. The first bailouts of the EU's peripheral countries were a disaster. The clearest demonstration of this error is not the fact that these countries failed to keep to their schedule of public deficit reduction; to that of their renewed access to the financial markets; or to that of stabilizing their public finances and their growth. No, the litmus test that proves that the first round of bailouts did not work is that a second and a third have had to be organized.

The Greek case is a paradigm: the "troika" is now considering a new debt "haircut" that would affect public creditors. In July, 2011 the EU had to radically reconsider the repayment deadlines for loans to Athens, extending these while reducing interest rates.

This second-generation bailout, in turn, is now under reconsideration, the prospective means being the more-than-likely concession of an additional period of two years for compliance with the deficit-reduction objective. The deficit-reduction schedule for Portugal has also been extended by a year, just as it was eventually made more flexible for Spain — a process that will probably have to be repeated — though without going to the length of a formal bailout.

The double error underlying this deficient design is relatively simple to describe. The description serves, with variants, as much for the Greek case as for the Portuguese or the Irish. On the one hand, cutbacks to public spending and other extreme austerity measures have been found to have a very limited impact in terms of reducing the deficit owing to the stubborn recession, which is shrinking tax revenue faster than spending cuts can balance the budget. More time is needed. On the other hand, structural reforms in states with shortcomings in modern structures — revenue inspection, universality of taxation, fiscal morale, quality of registries — also require longer periods of time for effective implementation.

The fact is that precious time has been lost while certain prosperous countries, in particular Germany, were slow to become convinced of the need for greater flexibility. They have arrived at this conclusion owing not so much to the concern generated by violent social unrest in countries such as Greece, as by the first indications, or evidence, of the damage being caused to the euro zone and to its leading economies. Aggravating all this are the factors of political crisis; and, in some cases, violence, populism, xenophobia and the emergence of extreme-right movements.

But this is not the time to cry over spilt milk. Rather, it is now time for the opening of floodgates to compensate budgetary rigor (which is indispensable) with the necessary measures of stimulus. The EU's budgetary discussions, which are now getting underway, with a time-frame of the next seven years, are a first-rate opportunity for learning from past mistakes. If these are not to be repeated, there must be a notable increase in flexibility, in the generosity of EU-wide common programs, and in the quantities specifically assigned to social and territorial cohesion.