It’s not often that the G20, the summit of the leaders of the world’s biggest economies, is merely a preamble to a European meeting. But this week it is. When the world’s leaders met in Los Cabos, Mexico they had one thing on their mind: Europe. And while the leaders of the G20 had a lot to say about the European debt crisis, the real test, and the real action, will happen in Brussels next week, where we expect the European Council to agree to an action plan.
In Mexico, European leaders hinted at how this plan might look: a unified banking sectors and regulations, pooled economic sovereignty, and a European Central Bank more willing to come to the aid of struggling member states. There will also be money. Lots of it.
I’m going to go out on a pretty flimsy limb, here, and say Europe is not going to systematically collapse. It’s true: it’s possible. And it’s true that a lot of very prominent academics, and even leaders, have said it is more than unlikely. And it’s also true that if it happened it would be, in the words of Yves Tiberghien, a scholar at the University of British Columbia, the “defining crisis of the entire century.”
But I have some faith that European leaders will do whatever is necessary to stop that crisis from happening. While it’s true German Chancellor Angela Merkel has many problems with the proposed measures and they might even prove difficult constitutionally for Germany, Europe does not want to be responsible for or a part of a global economic and political collapse. Neither do China, India, Russia, or Brazil—who agreed in Mexico to boost the International Monetary Fund’s emergency lending pool to $456 billion.
So let’s skip seven steps ahead of ourselves here and get to the good stuff. Assume Europe passes the extraordinary measures needed to stabilize the continent (I know, I sound like an economist) and the rest of the world supports them (hello, Washington, anyone there?): What now?
Just as the United States needed financial reform to prevent another crisis (though it’s unclear if those reforms were tough enough), Europe will need reform to ensure stability sticks around.
There are several facets of this solution, but since both this blog and I focus on the issue of corruption (among others) I’ll speak to that one. I don’t want this to be interpreted as an oversimplification. Anticorruption measures are not a panacea and while they are necessary to solve Europe’s debt crisis, they are not sufficient.
As a new Transparency International report points out, political and business corruption in Europe threatens to further weaken these vulnerable economies to the European crisis. Corruption is not a problem limited to the developing world—in Europe few countries regulate lobbying or give citizens easy access to public information, which stymies public accountability, perpetuates a culture of corruption, and allows political and business elites to divert funds. This, in turn, means public money is spent inefficiently.
The European Union—particular the most vulnerable member states, including Greece, Italy, Portugal, and Spain—must address these systematic weaknesses that will contribute to a long-term, sustainable future at the same time that they address the short-term fixes for the debt crisis. Why? Because there is nothing like a crisis to focus the collective mind.
If we learned anything from the Dodd-Frank Wall Street Reform and Consumer Protection Act (other than, hey, maybe financial regulation bills don’t need to be 2,300 pages long), it’s that political will for serious reform is very fleeting. Unfortunately, that bill failed to address the major causes of the mortgage meltdown and it probably won’t prevent another crisis. In large part because we waited too long.
Take this lesson to heart, Europe. The time for addressing the systematic problems that will contribute to another debt crisis isn’t tomorrow, next week, or after breakfast. It’s now.
Disclaimer: Unless specifically stated to be the views of the Task Force, the opinions expressed on this blog are solely the opinions of the individual blogger and are not necessarily those of the Task Force on Financial Integrity & Economic Development.