Loose talk is destroying the euro zone

Europe’s leaders should be more careful about what they say. In a radio interview on Friday, Wolfgang Schaüble, Germany’s finance minister, predicted that the current turmoil in financial markets would last for another “12 to 24 months.” Whether or not this was an off-the-cuff remark is immaterial. There was simply no need for Schaüble, one of the world’s most important policy makers on whose every word the markets hang, to say such things when the euro-zone crisis is spinning out of control. This is not the first instance of misguided comments by Europe’s crisis managers. The most egregious case was the repeated denials during the first year of the crisis that Greece was bankrupt, thereby blurring the line between fundamental problems of solvency and temporary liquidity ones, like those faced by Spain and Italy. Even policies required to resolve the crisis have been badly communicated, particularly the deal struck in October 2010 to include private creditors in sovereign debt restructurings. Regrettably, and to the consternation of jittery investors, the blunders are becoming more frequent at a time when the euro zone can least afford them. The growing likelihood of a Greek exit from the single currency bloc is fueling panic in the markets and increasing the risk of a self-fulfilling loss of confidence. This is because investors view developments in Athens through the prism of contagion to Spain and Italy. If ever there was a time for euro-zone leaders to say the right things, it is now. Yet rather than seeking to allay fears of contagion, policy makers are fueling them. This time it is the European Central Bank that is fanning investor concerns — not a good omen considering it is the only European institution the markets look to to shore up confidence. Not only are members of its governing council now talking openly about the possibility of an event they insisted was out of the question just weeks ago, they are even suggesting that a Greek exit would be containable. On May 12, Patrick Honohan, Ireland’s central bank governor, argued that a Greek withdrawal from the euro zone could be “technically” managed. A week later, his Belgian counterpart, Luc Coene, said that “an amicable divorce — if that was ever needed — would be possible.” Even Mario Draghi, the ECB’s president, conceded for the first time that Greece may leave the euro zone. For a scenario that the ECB only recently deemed “unthinkable” and whose consequences, it warned, were “incalculable,” these are striking admissions, and ones that carry big risks. The first is that, at such a politically and psychologically sensitive time in the euro-zone crisis, the markets take these statements as a sign that policy makers believe a Greek exit is now more or less inevitable.