Let Europeans Handle their Own Crisis
‘Iatrogenesis,” derived from a Greek word, describes how a patient’s condition can worsen because of complications from prior medical treatment. And iatrogenesis is precisely what the European Union is experiencing because of its leaders’ unwillingness to face reality in confronting Greece’s sustained, reckless fiscal policies.
EU leaders are now struggling to hammer out yet another short-term, Rube-Goldberg-like deal to prevent their finances and even governments from collapsing. But how can continuing to spread the risks and costs of mismanagement in Greece and other EU member states work long-term?
This ongoing turmoil over EU finances is directly traceable to basic flaws underlying “the European project.” Not only is the common currency, the euro, flawed conceptually and structurally, but the larger political dream to make “Europe” an alternative “pole” to the United States internationally was mistaken from the outset.
Europe’s political leaders have tried to make EU headquarters in Brussels into the centralized government an alternative pole requires, but average citizens of EU members have never seen this as a critical objective.
If anything, voters in nation after nation (not just longtime skeptics in Great Britain) have grown ever more dubious. Each effort by European centralizers to overcome the flaws in their design only enhances the concern that EU leaders are making decisions with little or no democratic legitimacy. The EU’s awkward compromises invariably create cumbersome, inadequate institutions, further antagonizing average Europeans.
The current euro crisis has brought this repeated confrontation — between leaders with global pretensions and citizens who just want their politicians to be democratically responsive — to epic proportions.
EU decision-making about the euro’s travails seems complex and arcane to outsiders, but the basic problem is simple. Greece’s inability to repay its debts underscores that several other EU members (Spain, Ireland, Portugal and Italy) have also pursued extravagant fiscal policies. Thus, if Greece defaults, the inevitable crisis of confidence could trigger defaults throughout the Eurozone, endangering the entire continent’s economy.
Instead of recognizing that a Greek default is the only responsible way to deal with irresponsible behavior, Europe’s leaders have tried for almost two years to avoid the inevitable. Instead, they’ve sought to marshal funds from any available source to lend to Greece, thus enabling it to repay its near-term obligations. To avoid future problems caused by the debt being piled on Athens, Greece must undertake painful austerity measures, which, applied less drastically years ago, could have avoided today’s crisis.
Unfortunately, there’s not enough existing money to shore up Greece and other potential defaulters, so EU politicians are telling private banks to take a “haircut,” perhaps losing 60 percent of the money Greece owes them. This, of course, is a default by any sensible definition.
If private banks are browbeaten into accepting such big losses, it means the sovereign debt they carry on their books at face value is actually worth much less. Thus, the banks’ underlying capitalization is now at risk; they are way overleveraged, requiring either new capital or substantial deleveraging to return to financial soundness.
Of course, there isn’t enough money to do that, either, so EU leaders have tried to create sources of money, first using the EU central bank, then creating a “financial stability fund” — and now creating a “special-purpose vehicle” to be a “firewall” against future defaults.
Why should anyone believe them? Why should private investors rely on the “insurance” the new facility will provide, and why should they sink funds into the new vehicle? When this third vehicle comes unstuck, as is almost inevitable, will the Europeans create a fourth institution to save the earlier, failed ones? This is the definition of iatrogenesis.
What should be America’s role in these EU efforts? Limited, at best. We should obviously be concerned about the effect on US financial institutions and economy of massive failure in Europe, and we’re entitled to take precautionary measures. To date, our involvement has been mostly indirect, via International Monetary Fund financing — and opposition in Congress even to such indirect assistance is rising, and properly so.
Much of the EU project is an effort to create a global alternative to the United States. The Europeans are certainly entitled to try, but they’re not entitled to our assistance when they fail, as they’re in the process of doing. Trying to rescue the European Union’s failed political objectives should be off the table in Washington.
John Bolton is a former US ambassador to the United Nations.
This article originally appeared in the New York Post