James Saft is a Reuters columnist. The opinions expressed are his own.
Europe‘s rule-based approach to fiscal reform will fall short because it effectively ignores the dynamics of credit markets, which laid the tracks along which this train wreck traveled.
Europe moved last week to impose some discipline on its member states’ fiscal houses, choosing a rule-based fudge rather than the fiscal union that a common currency probably ultimately needs. It will thus take discretion away from member states, pre-committing them to austerity measures during tough times, while doing very little to address the malfunctions in the banking system which create destructive credit bubbles in the first place.
Reforming Europe‘s fiscal framework without addressing the financial system which created all of the credit is like having alcoholics take ever more severe pledges of sobriety and penalties but still allowing them to own cocktail lounges.
To be sure, some sort of reform is welcome. The past decade has provided ample evidence that the previous framework was easy to game for states without sufficient discipline.
That said, while the shambolic arrangements of the euro zone have hamstrung attempts to react to the crisis, the means by which euro zone states got themselves into trouble are varied.