It’s time for a wider European policy debate
By Mohamed El-Erian
The opinions expressed are the author’s own.
It is safe to say that there is broad agreement on what is most desirable for solving the Irish crisis — namely a mix of domestic policies and external financing finely calibrated to enable the country to grow strongly, create jobs, stabilize the banks, and overcome large and mounting indebtedness.
Unfortunately, what is most desirable is not feasible given the path Europe is embarked on; and, to make things even more complicated, what appears feasible to Europe is not necessarily desirable. As a result, Ireland finds itself stuck in an unstable muddled-middle. It can’t get ahead of the crisis; it is far from a first best solution; and it confronts choices that are painful to implement and uncertain in outcome.
What is evolving in Ireland today resembles what was done in Greece six months ago. Expect the Irish government to commit to even greater budgetary austerity, its European neighbors and the IMF to provide massive funding, and the banks to receive liquidity, capital injections and other unconventional forms of support.
While seemingly exceptional to many, this approach constitutes the path of least resistance. In fact, it is the most feasible. But we should not confuse feasibility with desirability.
At its roots, the approach addresses liquidity but not solvency. It adds to the debt overhang rather than reducing it. And it uses the socially-painful method of income and growth compression as the principal way to promote international competitiveness over time.
It should come as no surprise that, six months after having embarked on such an approach, Greece is still in crisis mode. Risk spreads remain at elevated levels that discourage new investment. Society faces a higher-than-programmed contraction in economic growth and poorer employment prospects. The government is forced into even greater fiscal austerity. Meanwhile, private creditors have been using the exceptional support provided by the EU/ECB/IMF to exit their Greek exposures rather than co-invest with the official sector.
At some stage, Europe will need to find a better way to reconcile desirability with feasibility. It needs alternative approaches that, while also falling short of a first best, could prove more effective in overcoming the debt overhang, restoring competitiveness, and facilitating pro-growth economic re-structuring.
Inevitably, these alternatives will push national and regional policymakers out of their comfort zone. In a wider policy debate, debt restructuring would be considered as a possible pre-emptive option rather than a disorderly inevitability; thought would be given to the possibility of the weakest Euro-zone members taking a type of sabbatical from the club and rejoining on a stronger and more sustainable basis.
Time is of essence. Europe must give serious consideration to a wider range of approaches. It is in a good position to do so given the undeniable strength of core Euro-zone countries, anchored by a fiscally sound and economically robust Germany.
In this much-needed wider debate, none of the options on the table would be easy or risk free. Yet the longer it is postponed, the greater the risk that the peripheral European problems will spread further and, in the process, the region as a whole will lose out in terms of both what is desirable and what is feasible.
Mohamed A. El-Erian is CEO and co-CIO of PIMCO, and author of a New York Times/Wall Street Journal bestseller “When Markets Collide” (2008).
Photo: Mohamed El-Erian. REUTERS/Daniel Munoz