The leaders of the Group of 20 major economies, at their June 18-19 summit in Los Gabos, Mexico, adopted a declaration emphasizing the need to resolve the European financial crisis, among other things. The declaration in part said that “Euro Area members of the G-20 will take all necessary policy measures to safeguard the integrity and stability of the area.”
The European Union and the eurozone countries have not yet come up with truly effective measures to solve the crisis in Europe. It is important for the eurozone countries to work out a concrete road map as soon as possible to end the crisis. Their demonstrating a strong determination and quick joint action are all the more important, because the crisis in Europe carries the danger of crippling the global economy.
After Greece’s sovereign debt crisis surfaced in the fall of 2009, a similar crisis spread to Ireland, Portugal and Italy. The crisis flared up again in Greece and a similar crisis has loomed big in Spain. Although political forces supporting the existing austerity program won in the recent Greek parliamentary elections, markets have strong apprehensions about the debt crises in Spain and Italy.
The problems faced by Spain result from the burst of a real estate bubble and accumulation of bad debts. The eurozone countries have expressed their readiness to inject up to €100 billion to help Spanish banks. But the funds are supposed to go to banks by way of the Spanish government. Since this means that the Spanish government’s debts will increase, it has disappointed markets.
The root cause of the crisis in Europe can be attributed to the fact that while the eurozone countries have a common monetary policy, they lack integrated administrative actions for such things as bank supervision, bank insolvency, bank bailouts and deposit insurance.
If this approach backed by strict oversight is taken, it will contribute to promoting healthy banking management and to quickly carrying out the disposal of bad loans. Although it would mean that individual governments let the EU take over much of their sovereignty in administering the financial sector, a weak point of the eurozone would be overcome.
As a long-term goal, eurozone countries should consider institutionalizing the issuance of common bonds. To overcome the current crisis, it will be important that they show determination to push for the further integration of Europe. Germany may have to shoulder more burdens, but its role will be crucial.