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An MEP's viewpoint: Europe's catch 2012

Monday 14 November 2011 - by Sharon Bowles

 Cash handouts for struggling eurozone countries is more in line with a communist system than a capitalist one but what is the alternative, asks MEP and chair of the European Parliament's economic and monetary affairs committee Sharon Bowles.

The direction of the European, and potentially global, economy appears currently to rest on one decision: does the ECB intervene by purchasing periphery government debts in large quantities, also called quantitative easing, thereby basically printing money?

To many, this now appears to be the only option - the alternative is a financial meltdown - but is it actually a different option? We did not get into this situation by sheer bad luck and whichever path we take, serious and life changing adjustments need to be made.

If the ECB ramps up purchasing of government debt, currently with the focus on Italy, there are two approaches: it can either do it on a case-by-case basis, buying varying amounts whenever there is a need in the market, or come out and say it will buy up all debt due for a certain period of time, say the next three years.

In either case, the ECB is handing out cash when each struggling state needs more money. State A is struggling more than state B, so gets additional help from the ECB. Some call this 'moral hazard' as it rewards poor performance; others might even think it is more in line with a communist system than a capitalist one!

Setting out a path of cash handouts can only work with further fiscal integration, and when done under current stressed conditions looks like ceding control to nations that have not mismanaged their finances to the same extent.


Politically, full integration will take, at best, years to accomplish and may not happen in the way that people would expect - with powers ceded to Northern Europe. This will never go down well in the GIIPS: Greece, Italy, Ireland, Portugal and Spain.

If the ECB embarks on large-scale purchasing before integration takes place, public funds are in effect being used to pay off private investors who bought periphery debt, extending a process that saddled governments through banking bailouts.

Although there have been perverse regulatory incentives, it is still poor lending being bailed out by the prudent, which should not happen. If fiscal integration were then to fail, all ECB intervention would have to be immediately cancelled, meaning a financial meltdown would inevitably follow.


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