The task of officials at last week's EU summit in Brussels can be likened to building a bridge. The fiscal and structural adjustments required of Europe's heavily indebted economies will take time to complete. Time will be needed in Italy to get parliamentary agreement on new taxes and even more time to begin collecting them. Rooting out tax evasion and privatizing public enterprise in Greece will take time. Whether pro-growth reforms actually succeed in producing growth similarly will take time to tell.
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The problem is that the indebted and struggling European-periphery governments will not be able to fund their operations without official support in the meantime. With the outcome of the policy process uncertain, investors prefer to wait before buying bonds. They want to see not just good intentions but also good results.
So the crisis countries need help to get from here to there. They need the European Central Bank (ECB), the European Financial Stability Facility, the European Stability Mechanism, and IMF, in some combination, to step up and finance their governments while the requisite reforms are put in place.
The subtext of last week's negotiations concerned the terms on which this official support will be provided. The implicit question was whether the European Commission, the ECB, or the IMF would negotiate the conditions attached to the loans. The focus on legal reforms designed to strengthen fiscal discipline by giving the European Commission and the European Court of Justice roles in overseeing the fiscal conduct of member states was designed to make official creditors more comfortable about opening their pocketbooks.
Many details remain to be worked out, to make an understatement. But the outlines of the bridge can now be discerned. There will be strengthened fiscal rules and enforcement, whether through national legislation as a balanced-budget law or protocols to existing agreements. Consolidation and structural reform will proceed. And with governments doing their part, the ECB and its partners will provide the bridge finance needed to fund governments in the meantime.
But the danger is that the European Union and the international community are building a bridge to nowhere. Fiscal consolidation is needed, no doubt. Structural reform is well and good. Emergency financing is necessary to buy time. But none of this actually ensures the resumption of economic growth. And without growth there is no way that the eurozone crisis countries can make it to the other side.
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