$1.3 trillion package may please markets but doesn't deal with underlying problem
For a while there it looked as if a sovereign debt iceberg, of which Greece is merely the tip, was about to hole the good ship Global Recovery.
The massive sums put on the table at the weekend by the governments of the European Union and of the eurozone in particular, reinforced by the International Monetary Fund, should allay those fears.
At least for the time being.
The danger was that one country after another would become the focus of self-fulfilling doubts about its ability to roll over (ie, repay) its debts as they fell due.
The ability of any borrower, even a sovereign state, to access loans depends ultimately on lenders' confidence that they will get their money back.
If that confidence starts to evaporate, the interest rate climbs, widening deficits that are already too wide and adding to a stock of debt already too high, which only compounds concerns about creditworthiness. It can become a kind of death spiral.
That is not just a problem for the debtor government and its citizens, but for the banks that lent it money, and their counterparties in turn. The global financial crisis two years ago was a stark lesson in how interconnected the world's financial system is, and how widespread the consequences if credit markets seize up.
So we all have cause to be grateful for the "shock and awe" scale of the package of credit lines the Europeans and IMF have put up - €750 billion ($1.3 trillion) plus an undertaking by the European Central Bank to buy government bonds if need be to support liquidity in those markets.
It equates to more than 70 per cent of the outstanding sovereign debt of the "pigs" - Portugal, Ireland, Greece and Spain - and more than 10 per cent of government debt in the euro area as a whole.
This has allowed the governments to seize the initiative back from the markets. It buys them time.
But it does not deal with the underlying problem.
The problem is that the Great Recession has left almost every developed country government up to its chin in debt and sinking under the weight of an unsustainable structural budget deficit.
This is not just a European problem. The IMF forecasts that United States government debt, measured against the size of the economy, will be nearly 100 per cent of GDP next year, up from 62 per cent in 2007.
Its structural deficit - the portion that will not come right as the cycle improves - will be over 7 per cent, compared with less than 3 per cent in 2007.
To give an indication of what debt at 100 per cent of GDP means, imagine if Finance Minister Bill English, in drawing up the Budget he will deliver next week, first had to set aside funds to service nearly $200 billion of debt.
That would put the Government's interest bill in the same league as its spending on health or education. As it is, it will be about a third of that.
For Britain the IMF forecasts a debt-to-GDP ratio of 85 per cent and a structural deficit of 6.2 per cent next year, and for the euro area 88 per cent and 4.5 per cent respectively.
That is well outside the requirements of the euro area's Growth and Stability Pact, which are deficits of no more than 3 per cent and debt levels of no more than 60 per cent.
It remains to be seen whether these countries can muster the political will for the unpopular measures - some combination of spending cuts and tax increases - needed to get their debt under control again.
If credible plans to do that are not forthcoming, the risk premium in their interest rates is bound to start climbing again.
It is a defining moment in the history of the European project.
They have come to a fork in the road where they had to choose between fiscal integration and monetary disintegration. They seem to have chosen the former.
The biggest structural weakness European monetary union has faced since its inception is the tension between having one monetary policy, set by the ECB in Frankfurt, but 16 different fiscal policies set in the eurozone members' capitals.
In a country like New Zealand there is more or less a simple seesaw relationship between monetary and fiscal policy. All else being equal, the looser the Government's fiscal policy is, the harder monetary policy has to work and vice versa.
In the euro area, by contrast, the ECB has to set monetary policy based on its view of a sort of weighted average of member states' fiscal stances.
The opportunities for free-riding, of the kind the Greeks appear to have indulged in, are obvious.
The Growth and Stability Pact is supposed to deal with that by delivering a degree of convergence in member states' fiscal policies, but especially lately it has been honoured more in the breach than the observance and is clearly not up to the job.
It is notable that the weekend's stabilisation agreement gives the IMF the central role in drawing up and monitoring financial aid programmes under the plan.
That implicitly recognises that the IMF is likely to take a stricter line on conditionality than a European institution would. The TV show Supernanny comes to mind.
If a first-home buyer needs his parents to guarantee his mortgage, he owes it to them to ensure he can service the loan and, if they are wise, they will keep a vigilant eye on his finances.
Similarly, if the European bailout plan is to work it will require a much greater level of fiscal rigour and convergence among the governments concerned than they have been accustomed to.
The European Commission is to propose new rules that would let authorities in Brussels assess national budgets before they are passed by their parliaments.
How far this goes in weakening a key feature of the European architecture - that the power of the purse resides with national governments - remains to be seen.
And it is not just a matter of budgets. The broader economic causes of divergences in productivity and competitiveness must also be addressed.
The implications for sovereignty have already been seized upon by eurosceptics in the British press.
This from the Times: "A single currency ultimately requires a transfer of fiscal powers towards the centre. If that does not happen then eventually weaker members will contaminate the wider area."
Britain has it own problem, the newspaper said. "But, praise be to the Greek gods, it also has the independence with which to address them."
