Nicole Gelinas:
Because Europe has ignored the market’s pleas, and refused either to assume countries’ debts or to allow them to default, it has increased the chances that the euro will disintegrate. That could trigger a credit crisis more severe than the 2008 meltdown. It would be a reminder that the longer governments repress market discipline, the more painful a return to it is. But despite the pain, such a correction looks increasingly likely—and necessary. Greece, for instance, could then create a new, devalued drachma and pay back its debt more easily in the cheaper currency. That cheaper currency, coupled with the measure of certainty that comes with cutting losses, would soon attract investment and jobs. And the departure of the hated technocrats could help Greece look within and achieve the labor-force and tax reforms that it needs.
The American financial crisis was no more a failure of free markets than the European crisis was. Just as investors tried to signal that something was wrong with the euro, they tried for decades to show that something was rotten in American finance. The rot remains, but Washington has spent the past two years demonstrating that it would rather distort or block market signals than rely on them. This strategy thwarts economic recovery.
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