Aggregating Conceals Some Important Facts

The Wall Street Journal

Let us not praise famous men, to borrow from James Agee.

Not Angela Merkel, who asks all players in the euro-zone drama for patience, an attribute of which the market is short, rather than long. But then, markets have never been more than an annoyance to Europe's political class.

Not Nicolas Sarkozy, who continues his drive to forge a one-size-fits-all set of policies as part of his plan to establish centralized economic management of the euro zone and cripple Britain's financial sector and flexible labor market.

Not Jean-Claude Trichet, who German experts say is destroying the credibility of the European Central Bank by shoring up the bonds of countries and banks that can't otherwise attract funds at sustainable rates.

Not even International Monetary Fund head Christine Lagarde, who after a whirl at candor decided that Europe's banks are not in as bad shape as she originally claimed.

And certainly not the members of the euro-zone bureaucracy, who equate scheduling a meeting with solving a problem.

Any list of famous men not worthy of praise would be incomplete were it to exclude U.S. Treasury Secretary Timothy Geithner. Having presided with his president over the first-ever downgrading of the debt his department issues, Mr. Geithner hied to Wroclaw, Poland, to share his wisdom with the assembled European finance ministers, who pointed out that the euro zone is less indebted than the U.S. and not well placed to warn them, as Mr. Geithner did, of the danger of dependence on foreign creditors.

In contemplating the problems of the euro zone we tend to treat it as an aggregate, even though aggregation often conceals important facts. So let's disaggregate.

Start with Greece, a country with troubles too deep-rooted to respond to stern sermons from Ms. Merkel, or hectoring from Paris. When Greek Prime Minister George Papandreou responded to a Merkel-Sarkozy threat to withhold €8 billion ($11 billion) of bailout money by raising property taxes by €2 billion to fill a budget gap, he made a significant confession: Since the tax-collection system is inefficient and corrupt, and official tax collectors continue to oppose new taxes and reform of their department by working-to-rule, the new levy will be added to electric bills.

But the utility unions say they won't collect the tax, property owners say they won't pay, and even if they do, Greece's deficit: GDP ratio is estimated to be stuck at 10%, nowhere near the 7.4% promised in return for the bailout.

Oh, and despite a pledge to its bailers to appoint only one new civil servant for every 10 retirees, official data show that 7,000 have been appointed to replace 20,000 retirees.

Portugal's central bank has just discovered that Madeira island, an autonomous region, has been under reporting its deficit since 2004, to the tune of €1.1 billion. That will add 0.3% of GDP to earlier estimates of the deficit, which Portugal is pledged to reduce from 9.1% of GDP last year to 5.9% this year in return for a €78 billion bailout. No matter to Alberto João Jardim, the long-time governor of Madeira, who promises, "I won't stop construction work and I won't lay public workers off." Throw in the previously unreported loss of €568 million on a public-private partnership contract, and euro-zone officials charged with disbursing bailout funds to the Lisbon government must be more than a little unhappy.

Then there is Italy, the poster-child for policies that stifle economic growth. To be sure, the fiscal plans are bold—a five percentage point fiscal tightening by 2014. But three-fourths of the deficit reduction is to come from tax increases, which are likely to drive growth from zero into negative territory, and only one-fourth from spending cuts, as Prime Minister Silvio Berlusconi fears more would bring down his government.

Many Italians now favor still another tax: a one-off levy on the €10 trillion in wealth held by a relatively few families. Proponents say it would instantly yield a huge revenue haul, and want to institute it immediately so the rich don't have time to slip assets out of the country. Probably already too late. Little wonder that it takes ECB intervention, which can't continue indefinitely, to prevent yields on Italian bonds from piercing the supposedly unsustainable 6% level.

It is individual situations such as these that add up to the euro-zone crisis, and to the pressure on European banks that hold large amounts of dicey sovereign debt. All of which is why it was encouraging to have Robert Zoellick, president of the World Bank, say last week that he is "skeptical of predictions of advanced economies' inevitable decline," the key word being "inevitable." We are not dealing here with the concept of "It is written," that Lawrence of Arabia allegedly ascribed to Arab fatalists who thought the scope for individuals to affect events is limited.

If Europe, Japan, the U.S. and China must "face up to [their] responsibilities…," crises can be avoided. In the case of Europe, "It is not responsible for the euro zone to pledge fealty to a monetary union without facing up to either a fiscal union that would make monetary union workable or accepting the consequences for uncompetitive, debt-burdened members…. The time for muddling through is over", and not only for Europe.

The World Bank president carries none of the baggage of the U.S. Treasury secretary. Perhaps he will therefore get a more serious hearing from euro-zone decision makers than was accorded poor Mr. Geithner. Or perhaps not. Luxembourg's finance minister, Luc Frieden told Reuters on Saturday, "The situation … is not serious."

—Irwin Stelzer is the director of economic policy studies at the Hudson Institute, Washington