The Greek bailout and cheap loans may have pulled Europe back from the edge, but economists warn that without real change, the eurozone will continue to teeter.
Berlin and Frankfurt
Europe is heaving a sigh of relief. A messy Greek default has been averted, a permanent rescue fund is about to be installed to prevent future “credit events” with EU governments, Europe’s banks have received massive cash injections from the European Central Bank (ECB), and there is relative calm in the financial markets.
Is this the beginning of the end of Europe’s debt crisis?
No, it is not, warns Jens Weidmann, president of the German central bank, the Bundesbank, and former economic adviser to Chancellor Angela Merkel.
“At its roots, the debt crisis is a crisis of confidence in public finances, and one of competitiveness of certain European economies,” Mr. Weidmann told reporters in Frankfurt earlier this week. “These issues have to be addressed by national policymakers. If our liquidity provision results in these politicians not addressing the problems, we have gained nothing.”
The remarks were a rather undisguised criticism of the ECB – on whose governing board Weidmann sits – and its strategy of pumping cheap money into the European banking system to spur liquidity. In the past few months, the ECB has handed out more than a trillion euros worth of three-year loans to European banks at a mere 1 percent interest. ECB president Mario Draghi was praised widely for his initiative, but the strategy, Weidmann said, could encourage banks to adopt unsustainable business models and governments to slow the pace of fiscal and structural reforms.
The argument of the central bankers overshadows a week of optimistic signals in Europe. On March 12, the eurozone finance ministers agreed on the full release of the second bailout package for Greece, worth €130 billion ($170 billion). By March 14, the decision had been backed by all eurozone governments and parliaments. Earlier this week, the rating agency Fitch upgraded Greece’s credit rating by one notch to a B-minus – the first time Greece's rating has been upgraded since the debt crisis exploded at the end of 2009 and the first Fitch upgrade since 2003. Today, the International Monetary Fund (IMF) confirmed it was providing its share of €28 billion ($36.6 billion) in the aid package for the struggling government in Athens.