Euro Zone Needs to Tackle Its Biggest Deficit—Leadership

THE WALL STREET JOURNAL: As the euro zone scrambles to extricate itself once again from a mess of its own making with what appears to be an 11th-hour deal to save Greece from imminent default, the markets should keep their relief in check. At the heart of the euro-zone crisis lie a series of deficits: fiscal deficits, bank capital and liquidity deficits, and productivity deficits. But the biggest deficit of all is the shortage of political leadership. As so often over the past year, politicians have found just enough resolve to avoid immediate disaster. But without far greater bravery from Europe's leaders, the next crisis won't be long averted.

The biggest leadership deficit lies in Greece. Athens kick-started the euro crisis last year when it revealed that a combination of fraudulent accounting and widespread tolerance of tax evasion had saddled the country with a far bigger deficit than anyone had imagined. Prime Minister George Papandreou's government triggered the latest problems by backsliding on its commitments to the European Union, European Central Bank and International Monetary Fund to embark on major privatizations and structural reforms. Instead, it wasted precious months this year holding the euro zone to ransom with threats to restructure debts.

Only now its bluff has been called has Athens agreed to deliver on its promises in return for further bailouts. The alternative is a disastrous default and likely exit from the European Union. But even now the government is reluctant to shrink its bloated public sector, preferring to put the bulk of its fiscal consolidation on tax measures. Meanwhile, the opposition plays party politics over issues of national survival, undermining public acceptance of the program. No wonder other EU governments are reluctant to trust Mr. Papandreou and want strict conditionality to any loans.

Not that the rest of Europe is blameless. For too long, European governments turned a blind eye to weaknesses at the heart of their project. The single currency was always going to depend on member states exercising fiscal discipline and boosting their competitiveness to achieve convergence. Yet the Stability and Growth Pact that was supposed to deliver these goals lacked teeth; Europe stood by as Germany and France flouted the Pact by running excessive deficits. Greece wasn't the only country to reap the benefits of lower borrowing costs while refusing to reform; protectionist efforts to flout single market laws remain rife. Read on and comment » | Simon Nixon | Wednesday, June 01, 2011