Mampukah Eropa Bangkit? Selama 2 tahun terakhir mata dunia tertuju pada satu persoalan, krisis financial Eropa.

Momok yang mengerikan bagi pasar financial di seluruh dunia. Bagaimana negara dengan kekuatan ekonomi seperti Italia, Portugal, Jerman, Yunani dan Spanyol bisa mengalami krisis ekonomi? Apa saja langkah penyelamatan yang sudah dan akan dilakukan oleh masing-masing negara dan lembaga keuangan dunia untuk menyelamatkan Eropa? Dan sampai kapan krisis ini akan berlangsung? Siapa yang menyangka, zona eropa atau yang lebih dikenal dengan Eurozone bisa mnegalami kejatuhan financial yang begitu dalam. Padahal selama ini Eropa merupakan zona dengan kekuatan finanasial melebihi kawasan lain di dunia, selain Amerika. Dimulai dari Yunani, yang kemudian merembet ke Irlandia dan Portugal. Ketiga negara tersebut memiliki utang yang lebih besar dari GDP-nya, dan juga sempat mengalami defisit anggaran. Krisis utang Yunani kemungkinan merupakan buah dari kesalahan kebijakan pemerintahnya di masa lalu. Pada tahun 1974, Negeri para Dewa tersebut memasuki babak baru pemerintahan, dari junta militer menjadi sosialis. Pemerintah baru ini kemudian mengambil banyak utang untuk membiayai subsidi, dana pensiun, gaji PNS, bahkan membangun patung-patung di jalanan kota Yunani. Hingga awal tahun 2000-an, tidak ada seorang pun yang memperhatikan fakta bahwa utang Yunani sudah terlalu besar. Malah dari tahun 2000 hingga 2007, Yunani mencatat pertumbuhan ekonomi hingga 4.2% per tahun, yang merupakan angka tertinggi di zona Eropa, hasil dari membanjirnya modal asing ke negara tersebut. Keadaan berbalik ketika pasca krisis global 2008 dimana negara-negara lain mulai bangkit dari resesi, dua dari sektor ekonomi utama Yunani yaitu sektor pariwisata dan perkapalan, justru mencatat penurunan pendapatan hingga 15%. Disinilah, kecurigaan mulai muncul, Yunani tengah di ujung tanduk. Krisis mulai terasa pada akhir tahun 2009, dan semakin seru dibicarakan pada pertengahan tahun 2010. Pada tanggal 2 Mei 2010, IMF akhirnya menyetujui paket bail out (pinjaman) sebesar 110 milyar untuk Yunani, 85 milyar untuk Irlandia, dan 78 milyar untuk Portugal. Kemudian kekhawatiran akan terjadinya krisis pun berhenti sejenak. Keadaan semakin memburuk ketika pada awal tahun 2010, diketahui bahwa Pemerintah Yunani telah membayar Goldman Sachs dan beberapa bank investasi lainnya, untuk mengatur transaksi yang dapat menyembunyikan angka sesungguhnya dari jumlah utang pemerintah. Pemerintah Yunani juga diketahui telah mengutak atik data-data statistik ekonomi makro, sehingga kondisi perekonomian mereka tampak baik-baik saja, padahal tidak. Pada Mei 2010, Yunani sekali lagi ketahuan telah mengalami defisit hingga 13.6%. Salah satu penyebab utama dari defisit

tersebut adalah banyaknya kasus penggelapan pajak, yang diperkirakan telah merugikan negara hingga US$ 20 milyar per tahun. Kekhawatiran bahwa Yunani bisa saja mengalami default pun merebak. Ketika IMF memberikan pinjaman, IMF mengajukan beberapa syarat penghematan anggaran kepada Pemerintah Yunani. Diantaranya pemotongan tunjangan bagi PNS dan pensiunan, peningkatan pajak PPN hingga 23%, peningkatan cukai pada barang-barang mewah, bensin, rokok, dan minuman beralkohol, hingga perusahaan BUMN harus dikurangi dari 6,000 menjadi 2,000 perusahaan saja. Kebijakan yang sangat sulit untuk diterapkan, tentu saja. Pada bulan yang sama ketika Pemerintah Yunani mengumumkan kebijakan penghematan anggaran, rakyat Yunani langsung menggelar unjuk rasa besar-besaran di Athena untuk menolak kebijakan tersebut. Hingga kini, belum ada kepastian mengenai apakah Pemerintah Yunani berhasil dalam menerapkan berbagai kebijakan diatas atau tidak. Salah satu lembaga pemeringkat utang terkemuka, Moodys, masih menetapkan rating utang Yunani pada salah satu level terendah, yaitu CCC. Kekhawatiran atas kemungkinan default Yunani segera merembet ke negara Eropa lainnya, dan yang menjadi sasaran tembak pertama adalah Irlandia. Sejak awal tahun 2000-an, enam bank terbesar di Irlandia telah menyalurkan kredit besar-besaran ke sektor properti, hingga menyebabkan bubble. Ketika terjadi krisis mortgage di AS pada tahun 2008, seketika itu pula bubble tersebut meledak. Pada tanggal 29 September 2008, Pemerintah Irlandia menerbitkan obligasi dengan jangka waktu 1 tahun untuk menalangi kredit macet di enam bank diatas. Setahun kemudian, oblogasi tersebut diperpanjang, bersamaan dengan peluncuraan National Asset Management Agency. Pada Mei 2010, IMF akhirnya turun tangan, dan Moodys menurunkan rating utang bankbank di Irlandia menjadi junk status. Seperti kepada Yunani, IMF juga meminta syarat kebijakan penghematan anggaran kepada Pemerintah Irlandia. Pada September 2010, Pemerintah Irlandia masih belum mampu membayar obligasi tersebut, dan kembali memperpanjang waktu jatuh temponya. Hingga kini, belum ada kepastian mengenai kapan obligasi tersebut akan dilunasi. Di Portugal, ceritanya lain lagi. Sejak tahun 1974, Pemerintah Portugal mencatat pengeluaran besar-besaran untuk keperluan yang sebenarnya tidak perlu, bisa kita katakan sebagai pemborosan APBN, seperti biaya untuk membayar pihak-pihak tertentu yang menjadi makelar atau konsultan pada proyek-proyek pemerintah yang dikerjakan bersama dengan pihak swasta . Selama hampir 40 tahun, Pemerintah terus saja merekrut PNS hingga mencapai jumlah yang tidak efektif, dan membayar gaji dan tunjangan yang terlalu besar bagi pejabat tinggi negara, belum termasuk gaji besar untuk para eksekutif di BUMN. Pemborosan anggaran

ini sebenarnya sudah dikritisi oleh publik Portugal sejak lama, namun sayangnya Pemerintah Portugal tidak melakukan tindakan apapun untuk mencegah terjadinya krisis, hingga akhirnya negara harus menghadapi kemungkinan terjadinya kebangkrutan pada awal tahun 2011. Ketika Portugal menerima paket bail out dari IMF, Portugal juga diharuskan untuk menghemat anggaran, salah satunya dengan menghapus pembagian dividen pada Portugal Telecom (Telkom-nya Portugal). Seperti Irlandia, Moodys juga menurunkan rating utang Portugal menjadi junk status. Lebih parah, Moodys bahkan memperkirakan bahwa Portugal bisa saja membutuhkan bail out kedua, agar negara tersebut terhindar dari default. Sejauh ini, Uni Eropa telah merespon masalah utang di Yunani, Portugal dan Irlandia dengan menggelontorkan pinjaman yang berjumlah miliaran euro kepada mereka dengan harapan bahwa langkah-langkah penghematan yang ketat akan mereka lakukan. Tetapi, langkah-langkah pengetatan itu, akhirnya telah menimbulkan krisis politik yang hebat. Ketika krisis meningkat selama beberapa minggu terakhir, Bank Sentral Eropa mulai membeli obligasi Spanyol dan Italia dalam upaya untuk mencegah penularan krisis utang yang lebih luas. Tetapi, semuanya menjadi sulit, dan Eropa menuju keruntuhannya Managing Director Paramadina Public Policy Institute, Wijayanto mengatakan dalam kondisi saat ini, sulit bagi Eropa untuk bangkit dari keterpurukan keuangan. Pasalnya, saat ini kawasan Eropa menggunakan mata uang tunggal. Konsep mata uang tunggal memungkinkan berbagai negara menjadi free rider. Mereka tidak mengelola keuangan negara dengan baik, tetapi ketika krisis menimpa, negara zona Euro lain akan cenderung turun tangan dalam rangka menyelamatka Euro. Terjadi moral hazard yang kronis, kata dia.

Krisis 2011 sebenarnya merupakan kelanjutan krisis 2008 yang diawali dengan runtuhnya subprime mortgage dan meledaknya property bubble di Amerika Serikat. Kondisi ini dengan cepat menjalar ke Eropa, mengingat sebagian besar pembeli derivatif subprime mortgage tersebut adalah investor Eropa.

Pemerintah Amenka dan Eropa mengeluarkan triliunan dolar dana talangan untuk menyelamatkan perusahaan swasta. Sayangnya, sasaran yang diharapkan tidak tercapai. Pemerintah negara maju yang sudah mempunyai tingkat utang yang tinggi semakin terbebani (rata-rata hampir 90 persen produk domestik bruto-PDB), apalagi sebagian besar pemerintah mengalami defisit anggaran yang parah. Impasnya, krisis perusahaan swasta berpindah menjadi krisis pemerintah. Problemnya sebagian besar negara yang terkena krisis parah tidak lagi mempunyai kemampuan untuk memberikan dana talangan. Intinya, penyebab krisis adalah produk investasi manipulatif di berbagai negara maju dikombinasikan dengan kondisi keuangan pemerintahterjadi dan bagaimana wajah Eropa pada masa mendatang? Ikuti wawancara dengan Managing Director Paramadina Public Policy Institute. Wijayanto, yann banyak mengamati masalah ekonomi global.yang lemah. Secara umum bagaimana kekuatan ekonomi masing-masing negara di Eropa? Di antara negara-negara zona Euro, barangkali hanya Jerman, Belanda, dan Perancis saja yang relatif kuat. Sedangkan negara nonzona Euro, seperti Skandinavia dan Swiss berada dalam kondisi yang lebih baik. Yunani, Spanyol, Portugis, Italia, dan Irlandia termasuk yang paling parah dihantam krisis. Mengingat negara-negara zona Euro menggunakan mata uang yang sama, kegagalan mengentaskan Yunani dari krisis akan menyeret negara zona Euro lain ke dalam krisis yang makin dalam. Tantangannya tidaklah ringan, selain tingkat utang pemerintah yang sudah mencapai 160 persen PDB, Yunani juga mengalami trade dan budget deficit yang mengkhawatirkan. Recovery bagi Yunani bukanlah hal mudah, mengingat sekitar 20 persen ekonomi Yunani berasal dari turisme di mana sekitar 80 persen turis berasal dari EU yang saat ini sedang sakit. Tampaknya negara di zona Euro Ini tidak disiplin dalam anggaran sehingga mereka kebobolan? Problemnya kebijakan ekonomi di-hasilkan dengan menggunakan logika dan pendekatan politik. Politikus terlalu banyak berjanji memberikan berbagai jaminan sosial yang mahal, sementara sustainability-nya tidak dipertimbangkan. Ada kecenderungan orientasi jangka pendek semata, yaitu memenangkan pemilu. Sistim welfare Eropa cocok ketika ekonomi booming, tetapi menghadapi ancaman kebangkrutan yang serius ketika ekonomi mengalami krisis dan penduduk mengalami penuaan. Hal lain yang membuat kebangkitan ekonomi Eropa sulit terjadi dalam waktu dekat adalah konsep mata uang tunggal, di mana memungkinkan berbagai negara menjadi free rider. Mereka tidak mengelola keuangan negara dengan baik, tetapi ketika krisis menimpa, negara zona Euro lain akan cenderung turun tangan dalam rangka menyelamatka Euro. Terjadi moral hazard yang kronis. Peran penyelamatan itu saat ini ada pada Jerman dan Perancis, tetapi apakah rakyat mereka mau menanggung kesalahan negara tetangga? Saya yakin, Angela Merkel akan berpikir puluhan kali untuk mengeluarkan kebijakan penyelamatan Euro yang tidak sejalan dengan kepentingan para konstituennya. Apakah ini bisa dikatakan sebagai pudarnya pesona ekonomi Eropa?

Ekonomi Eropa menghadapi tantangan berat, baik jangka pendek (berupa krisis yang terjadi saat ini dan tidak berfungsinya mekanisme Uni Eropa dengan baik) maupun jangka panjang (berupa proses penuaan masyarakat Eropa yang terjadi dengan cepat). Kendatipun demikian, Eropa akan tetapmerupakan pemain penting ekonomi dunia, mengingat kualitas human capital dan teknologi yang mereka miliki. Bagaimana memagari agar krisis bisa dilegalisasi? Kalau kita berbicara Euro zone, melokalisasi krisis di zona itu hampir tidak mungkin dilaksanakan, mengingat mereka mempunyai satu mata uang, satu bank sentral, dan satu kebijakan moneter. Kondisi yang juga menantang adalah fakta di mana sebagian besar perdagangan negara Uni Eropa dilakukan dengan sesama negara Uni Eropa atau dengan Amerika Serikat. Ini artinya mereka melakukan jual beli dengan sesama negara yang sedang mengalami krisis sehingga menempatkan ekspor sebagai pull factor tidaklah realistis dalam jangka pendek dan menengah. Indonesia cukup beruntung, mengin-gat ekspor kita tidak terlalu besar dan kita lebih banyak berdagang dengan sesama negara Asia di mana kondisi ekonomi mereka relatif lebih baik. Pertanyaannya, sampai berapa lama mesin ekonomi utama di Asia, terutama Cina, bisa bertahan. Generasi muda mereka yang banyak dimanja dengan berbagai tunjangan mungkinkah bisa menurunkan fighting spirit untuk menjadi bangsa yang kompetitif? Tantangan bagi generasi muda Eropa adalah semakin meningkatnya dependency ratio, artinya semakin banyak jumlah orang tua yang mereka harus tanggung. Konsekuensinya, akan semakin besar porsi pendapatan yang harus mereka alokasikan untuk dana pensiun dan semakin kecil proporsi yang bisa digunakan untuk berbagai aktifitas investasi.

It's easy to see the appeal of the rumors swirling around Europe of a bold plan to the keep the euro zone's single currency together. For almost two years, the 17 euro-zone countries have done little to convince the markets that they're ready and able to do what it takes. The result is that Greece now seems poised to default and even quit the euro, and there is a mounting sense of panic in Europe's corridors of power about the collapse of their signature project. That underscores the allure of this week's chatter that the euro zone is preparing a "big bang" scheme that would write down Greece's debt by 50%, recapitalize European banks and boost the European Union's bailout fund to up to 2 trillion ($2.7 trillion). The risks of inaction are immense: the euro zone needs to act quickly and vigorously to stanch the bleeding Greek economy and limit contagion to other ailing countries. So far, E.U. leaders have agreed on two bailout packages for Greece and others for Portugal and Ireland. And they've contributed billions of euros in aid to ailing economies while pushing

through chilling austerity packages. But markets remain nervous about euro-zone debt levels. They now assume that a Greek default is inevitable and have turned their focus to Italy and Spain, economies that are too big to bail out under the euro zone's current rescue arrangements. As the European Central Bank's Jean-Claude Trichet said over the past weekend, the current situation is more precarious than the defining moment in 2008, when Lehman Brothers collapsed. "We are the epicenter of this global crisis," he warned. (See how much worse the euro crisis can get.) At the same time, Washington is piling pressure on European leaders to hammer out a solution to the crisis before it drags the rest of the world down. On Sept. 27, President Obama said Europe is "scaring the world" with its inaction. And U.S. Treasury Secretary Timothy Geithner said the threats of cascading default, bank runs and catastrophic risk had to be taken off the table. "Sovereign and banking stresses in Europe are the most serious risk now confronting the world economy," he said. "Decisions cannot wait until the crisis gets more severe." The emerging euro-zone rescue plan has three strands. First, leaders would raise its bailout fund, known as the European Financial Stability Facility (EFSF), from 440 billion ($595 billion) to about 2 trillion ($2.7 trillion). It is still unclear how this would be done, but Geithner suggested the EFSF could be leveraged by acting like a bank and drawing on funds from the European Central Bank (ECB). Critically, this would give it funds to buy government debt from countries that might be frozen out of the financial markets, in particular core euro-zone members Spain and Italy. Second, Greece would be able to write off half its debt, currently estimated at 160% of GDP and rising. While the euro zone has already secured an agreement for creditors to write off about 20% of what they are owed, the latest suggestion is for a managed default that would shave off at least 50% of the debt. Finally, the plan would pump money into any undercapitalized European banks that run into trouble because of losses on government debt. (See why it's make-up or break-up time for the euro zone.) Euro-zone policymakers are coalescing around a multifaceted approach that would prioritize a firewall around Italy and Spain. But Sony Kapoor, managing director of ReDefine, a Brussels-based economic think tank, says there is still a long way to go. "Any such deal will have to first reduce the borrowing costs for Spain and Italy, then strengthen capital and liquidity buffers for European banks, and only then decide once and for all how to tackle Greece," he says. In order to tighten compliance and ensure no repeat of the crisis, he predicts, new rules will be set for economic governance: "Any urgent financial-aid measures will no doubt be accompanied by ever stricter rules for the recipients of aid to comply with." Ostensibly this covers all the bases, and markets around the world reacted positively Monday, Sept. 26, to the rumors. But while these measures promise the emphatic policy response that has been lacking so far, at question is whether the scheme can get through the E.U.'s many institutional and constitutional hoops at a time when solidarity among European nations is at a postwar low.

Policymakers will be watching closely as a swath of European parliaments vote over the next few days on whether to accept the deal forged at a July summit to enhance the 440 billion EFSF. There's no guarantee for support. Many northern E.U. members including Germany, Finland, the Netherlands and Austria are showing increasing hostility toward the Greeks, whom they see as wayward and spendthrift. In Germany, polls show that 75% of German voters are against the move, and Chancellor Angela Merkel is expected to rely on the opposition Social Democrats and Greens to secure the parliamentary vote. (See why the euro hasn't been fixed yet.) The animosity is at least as strong in Greece, where a recent poll showed that 92% of Greeks thought austerity measures were unfair and 72% believed they would fail. With unemployment at 16% and the Greek press filled with stories of foreclosures, bankruptcies and rising homelessness and emigration, it is becoming increasingly hard for Greek Prime Minister George Papandreou to push for more cuts and sell-offs, despite pressure from the E.U., the IMF and markets. With anger rising across the E.U., it's difficult to broker any plan, no matter how brilliant and ambitious. So even if the rumors of a big bang prove to be true, it will still be a while before the euro zone can hope to see the other side of this crisis. With reporting by Joanna Kakissis / Athens Read more: http://www.time.com/time/world/article/0,8599,2095187,00.html#ixzz1cXRvpZll

Six reasons why Greece should default

As global stocks tank over rising fears of a double-dip recession, one country at the center of the storm has never exited the recession Greece. Amid its increasingly severe debt crisis, the Greek economy is in its third consecutive year of contraction, and, under pressure to slash state spending and stabilize its national debt, there is little hope that the situation will turn around any time soon. The IMF doesn't expect positive annual growth in the country until 2013! Earlier this week, the government approved yet another package of austerity measures, including cuts to pensions and public sector workers and a program to tax the poor. The measures are an attempt to appease Greece's creditors in the euro zone, who are demanding even harsher steps in return for continuing a $150 billion bailout given to Athens last year. Without those rescue funds, Greece could default on its debt. That default is something Europe has been struggling to avoid for a good 18 months. But more and more, I'm coming to believe Greece should default. Here's why: The prevailing wisdom concerning Greece is that a default on its $400 billion of sovereign debt would be a catastrophe for the world's financial markets and help speed the global

economy towards a renewed recession. We can't rule out that possibility. European banks are already under pressure (watch for more on that in this space), and losses inflicted by a Greek default, though unlikely to topple European banks, could heighten concerns about the health of Europe's financial sector, sending global markets into turmoil, worsening the euro debt crisis, and leading to something truly ugly. That would especially be the case if panicky investors fled the bonds of other indebted euro zone countries, like Italy and Spain, possibly causing the collapse of the monetary union. None of this is certain, of course, but we can't predict how the global economy would react to a Greek default, especially with sentiment already so weak. The general thinking is: Why take the risk? Keep bailing out Greece. The counter argument, though, is that we'd all be better off if Greece just defaulted. I've made the case before that a continued bailout of Greece was a bad idea, and the more I watch what's happening in the Greek crisis, the more I think Athens needs to just throw in the towel, default, and start over. First, a Greek default is inevitable. It is not a matter of if, but how. A default is built into the terms of the proposed second bailout package, in which private creditors are expected to swap or roll over their holdings of Greek bonds, taking a loss in the process. That would be an orderly default, perhaps, through which the process could be carefully controlled to minimize the impact on financial markets compared to a disorderly default, in which Greece just says: We won't pay! But it is still a default. Second, because of that reality, investors are already assuming Greece will default, and are preparing for it. I've argued in the past the Greece is not Lehman Brothers, and its default would not have the same disastrous effect on the global economy, to a great degree because there would be no shock value from a Greek default, as there was with Lehman. Greece has been on an obvious downward spiral for nearly two years now. Its one-year bonds are trading at a yield well over 100% -- a clear indication investors believe a default is coming. Since the markets are already anticipating a default, there isn't as much downside in actually having one. Third, the reason everyone assumes a default will happen is that the bailout program is not working. It has been 17 months since the first bailout of Greece in May 2010, and the situation in the country has only worsened. Its debt level is not under control, contagion hasn't been squashed, and there is no hope that Greece can return to private capital markets for funding at any point in the foreseeable future. There is a high probability that the EU is simply throwing good money after bad by continuing the current strategy. Fourth, the main reason the bailout is failing is that no one believes that Greece can fix its finances and reform its economy under the austerity program imposed by the terms of the rescue. Greece is already missing its budget deficit targets, even with all of the cutting and tax hikes. That's because the adjustment demanded is simply not politically, socially, or even mathematically possible. Since the austerity program is causing the economy to shrink, reducing debt and deficits is just that much more difficult. You end up like a dog chasing its tail. Due to the contraction of GDP in the first half of the year, economist Ken

Courtis points out that to keep its government debt to GDP ratio flat, Greece would have had to reduce its debt by an (annualized) 8.3%. In most languages this would be called impossible, Courtis comments. Increasingly, it appears the only way out is through a true debt restructuring the type of process triggered by a default. Fifth, in light of all of this, we can argue that the euro zone would do more good by using the Greek bailout money elsewhere. The leaders of the zone could, for example, utilize the funds to support Spain and Italy, the crises in which are the real threat to the future of the euro. Or maybe it's best to use the Greek bailout funds to recapitalize and shore up the European banking sector, which would minimize the impact of a Greek default. What I'm saying here is that the hundreds of billions being tossed at Greece might do a better job of ending the debt crisis if employed in ways that could truly bolster investor confidence in the monetary union and its financial system. Economist Nouriel Roubini recently made this point: Illiquid but potentially solvent economies, such as Italy and Spain, will need support from Europe regardless of whether Greece exits (the euro zone); indeed, a self-fulfilling run on Italy and Spain's public debt at this point is almost certain, if this liquidity support is not provided. The substantial official resources currently being wasted bailing out Greece's private creditors could also then be used to ringfence these countries, and banks elsewhere in the periphery. Sixth, the bailout program is pushing Greece towards complete economic and social turmoil. The economy is practically in free fall GDP shrank 7.3% in the second quarter, after an 8.1% contraction in the first. Protesters are regularly out on the streets. Unemployment stands at 16%. And there is no light at the end of the tunnel. Yes, the Greeks made a mess of their economy, and now they have to pay the price of fixing it. But at the same time, almost the entire process of adjustment has been imposed onto the Greeks. There has been an attempt on the part of the euro zone leadership to protect Greece's creditors as much as possible, mainly to hold off bailouts of the banks themselves. Though private sector creditors will absorb losses as part of the second bailout program (assuming it happens), Greece in the end is getting very minimal debt reduction in the process. Roubini calls the deal a rip-off because the amount of reduction is close to zero. So the current strategy is cruel, and in my opinion, simply unsustainable. So the Greeks should just stop paying their debts and force a restructuring that will allow the country to return to true economic health. If necessary, Greece should leave the euro zone and use its own currency, giving the country the ability to print money, pay its bills, and inflate the economy. Such a process will be painful for everyone. The Greeks will still have to undergo an excruciating process of reform. The EU will have to act immediately to shore up European banks and protect Spain and Italy from contagion. But like pulling off a bandage quickly, the pain will be sharp, but brief, and we can then all move on. At least to the next crisis.

Read more: http://curiouscapitalist.blogs.time.com/2011/09/23/six-reasons-why-greeceshould-default/#ixzz1cXSzxp8G

Why Europe can't solve its debt crisis

Any hope that last Thursday's debt crisis agreement would finally quell the contagion raging through the euro zone was dashed almost before the ink dried. Only a day later, Italy's borrowing costs actually rose to a euro-era high in a bond auction, a clear sign that investors were far from certain that the debt deal was a game changer in Europe. The leaders of the euro zone appear to have botched yet another opportunity to convince the global investment community that they could tackle the crisis. Why do Angela Merkel & Co. consistently disappoint? The reasons are many. They have repeatedly put their own domestic political concerns above the needs of the euro zone overall, leading to historic agreement that always fall short. They have shown a bewildering lack of urgency, stepping in too late with too little again and again. If the rich members of the zone are wary of committing their own money to support the euro, why should they expect private investors to do so? The debt burden of Greece, Italy and other euro zone countries is so huge, and the economic weaknesses of these nations so daunting, that it is simply impossible to address the problems in any reasonable period of time. But most of all, I fear the leaders of Europe are simply misunderstanding what is at the root of the crisis, and that faulty diagnosis is the reason why the medicines used are never a cure. Here's what I mean: So far, Europe's approach to the crisis has been primarily a combination of three elements: (1) bailouts to provide liquidity and financing to debt-heavy governments and prevent a sovereign default; (2) austerity measures and, to a lesser extent, structural reform in the troubled economies: and (3) moderate reform to the way the monetary union functions, such as stiffer sanctions on those government that break debt limits and closer coordination of national fiscal policies. None of the measures taken to alleviate these three problems have ever been sufficient the bailout fund has never been big enough, the reforms never extensive or credible enough, and the changes to the monetary union never strong enough.

But beyond that, these issues are only part of the reason Europe is experiencing a debt crisis. The real causes are being ignored. How's that? The bailout system is predicated on the belief that the debt crisis is first and foremost a liquidity crisis, that if the euro zone members put up enough cash to show they'll defend the euro, investors will feel better and the crisis will wind down. The austerity and reform programs have been mainly confined to the PIIGS the economies in the crosshairs of investors since the leaders of Europe seem to believe that only the weaker economies actually require reform. And the changes to strengthen the monetary union have mainly entailed the imposition of more rules, as if its flaws can be repaired by improving the way the existing structure functions. All of these three assumptions are wrong. The debt crisis in Europe has never been a liquidity crisis. That's why the bailouts have failed to stop it. Investors are fleeing the bonds of certain European countries because they believe their economies are fundamentally broken, simply uncompetitive compared to either stronger countries in Europe or up-and-coming emerging markets. That means investors don't have confidence in their long-term outlook, and thus their ability to handle their large debt loads. And the budget cutting and minor structural reform taking place isn't enough to change their downward course. The problem, in other words, is not concern over these countries' short-term ability to service their debt, but their long-term ability to prosper within the constraints imposed by the monetary union. Nor is the difficulty in the euro zone limited to the weakest economies. Yes, Spain, Italy, Portugal, Greece and Ireland need to reform themselves. But that's only one side of the story. Massive imbalances between its members lie at the heart of the euro zone's problems. On the one hand, you've got uncompetitive economies like Spain and Portugal that have tumbled into large current account deficits; on the other, stronger economies, especially Germany, that gorge on giant current account surpluses. These imbalances are at the center of the debt crisis, but they aren't being treated that way. The euro zone's answer has been to force the uncompetitive economies to become more competitive, by reducing their real costs and wages. But that is a painful process, one that is potentially unsustainable either politically or socially. The real solution lies in zone-wide reform. Surplus nations also have to change, to stimulate domestic spending and import more from the rest of the region, which would help the weaker countries grow and stabilize their debt. Or the euro zone has

to encourage these surpluses to be recycled into weaker economies not through bailouts or handouts, but real investment that creates jobs and growth. None of that, however, is taking place in any serious way. Lastly, the very structure of the euro zone is seriously flawed, and tweaking it isn't enough. No one believes that new rules and guidelines can be enforced, and no one believes they will be followed by governments will little history of doing so. The problem with the monetary union can be found in its decentralization. With no unified authority controlling fiscal policy overall, investors don't believe it can be controlled. The euro zone will be continually forced to adjust to the actions of its members, not the other way around, no matter what pacts are signed. And that decentralization presents a political hurdle as well. Though it is remarkable that 17 different nations with different interests can come together and reach agreement on anything the mere two parties in Washington haven't been able to achieve the same degree of compromise the fact remains that any one of the those 17 countries an upend any euro zone policy. We've already seen that happen, when Finland halted the process of forging a second bailout of Greece. That's why many economists believe the only answer to the euro zone debt crisis is more centralization the oftenmentioned fiscal union. But there is little evidence that the individual members of the euro zone will ever sacrifice the degree of sovereignty required to achieve such a union. Thus investors will remain unconvinced that any euro zone policies or programs can actually be effective. So in the end, the root problem is that investors fear the euro simply can't survive. The worry is that the debt crisis will bring to its knees the European experiment in integration not the other way around. To avoid that fate, the doctors of the euro zone have to write up the correct prescriptions. Otherwise, the disease will keep spreading.