EDITORIAL: Another financial crisis?

The financial turmoil triggered by the debt crisis in Greece is beginning to have global repercussions.

The contagion from Greece has spread to other European countries like Portugal, arousing fears that European banks holding huge amounts of government bonds of these countries may take a massive hit from the rolling crisis.

If many European banks fall into financial trouble and start shutting off new credit lines for businesses, Europe's economic recovery will be hobbled.

As fear begets fear, the stock markets of not just Europe but also the United States and Japan have tanked. European debt fears are casting a dark shadow on the world economy, which has finally begun to recover from financial market mayhem precipitated by the collapse of U.S. investment bank Lehman Brothers in September 2008.

The Greek parliament passed a package of tough austerity measures last week while demonstrators fiercely protested the newly approved spending cuts and taxes.

The eurozone members of the European Union and the International Monetary Fund have promised massive financial aid to Greece. Why have these steps failed to calm financial markets?

That is because the markets have two major concerns.

Many investors and market players doubt whether Greece will actually carry out the painful belt-tightening measures and regain fiscal health.

They are also questioning the commitment of the eurozone nations to bailing out a troubled fellow member.

Greece has an enormous number of well-paid government employees. The country needs to cut the salaries of public sector workers and raise taxes in order to clean up its public finances.

Vehement resistance to these steps is inevitable, but the Greek government has no choice but to implement the measures through tenacious efforts to persuade its citizens to accept them.

Eurozone heavyweight Germany has grudgingly embarked on rescuing Greece, while intensifying its criticism of the rating agencies that downgraded the government debts of Greece and some other European countries.

There are certainly many serious questions about the research capabilities of credit agencies and the appropriateness of their relations with clients.

But the latest sovereign debt downgrades were prompted in part by the view that the eurozone countries were not firmly committed to supporting Greece.

Some people in Germany are arguing that Greece should leave the European currency union.

But such a move would force a group of similarly debt-ridden countries into the same fate, eventually leading to the collapse of the eurozone.

Germany and other major members of the eurozone may now think that it was a mistake to allow countries without competitive industries like Greece to join the currency union. But the undertaking has long passed the point of no return.

Behind this crisis are the EU's innate weaknesses. It is difficult to ensure that members take similar fiscal policy stances even though they use the single common currency and accept monetary policy dictated by the European Central Bank.

The EU is also incapable of imposing fiscal discipline on members engaged in reckless deficit spending.

In addition, the EU countries often fail to work in concert to deal with a crisis although they act as one in normal times.

It is clearly necessary for the EU to devise an effective system to respond to challenges posed by a borderless economy.

Thus, it is not surprising that there is growing political momentum in Europe for a proposal to create a European version of the IMF.

The EU needs to strengthen its ability to cooperate in dealing with an economic crisis using various measures.

It should, for instance, enhance its monitoring of the economic policies of the member countries, launch a lending program to supply funds to crisis-stricken countries and take over part of the fiscal policy coordination among members.

To prevent the current debt crisis from causing chain reactions in other parts of the world, EU nations must work together to demonstrate a strong political will to contain the situation.

--The Asahi Shimbun, May 8