Persuaded that the disease had to be tackled at its root, we Europeans have deployed a four-pronged strategy to fight it: tough national reform programmes to recoup competitiveness and mend public finances, an overhaul of eurozone governance to fix its original design flaws, tighter regulation of the financial sector, and the establishment of rescue funds to shield troubled economies from short-term financing difficulties as they pursue their reforms.
Two years into this joint effort, it is clear that the strategy is right, and that despite formidable headwinds, it is bearing fruit.
The type of structural adjustment being performed in Europe is an absolute prerequisite for the strong, sustainable and balanced growth the G20 members have committed to promote. Yet in the very near term, it may subdue growth and in some instances exacerbate labour market pains, adding to the political pressure weighing on the most reformist governments. Likewise, it should be no surprise that the refinancing costs faced by some of these countries remain high despite clear improvements in their fundamentals.
It is hard to overstate how much personal sacrifice is being experienced across Europe today. But these sacrifices would have been in vain if we were to waver now and fall for the miracle cures of debt mutualisation, cheap money, fiscal stimulus and other soothing but toxic remedies.
Tackling a crisis of this magnitude is a long-term effort that requires stamina and patience. Temporary setbacks cannot be ruled out. There are more reforms to be made at the national level, for instance in the services and products markets. There are regulatory and supervisory lessons yet to be drawn from the financial crisis. Fiscal and economic policy, but also financial sector legislation and supervision, will have to become more integrated at the European level.
Underpinning and legitimising these separate initiatives is an overarching effort to progress toward political union, deepening the political and institutional edifice that supports the European economic and monetary union.
But the crisis does not just bear lessons for Europeans. Like the laws of physics, the laws of economics apply to all of us. One universal lesson of our crisis is that confidence, in particular market confidence, does not bend and bounce back like a reed. It breaks. And when it does, it is very hard to repair.
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