Monday, October 24, 2011

Hoping that the Minimum is Enough in Europe

The headline of this New York Times story is somewhat at odds with the substance of what happened this weekend in Brussels regarding the eurozone debt crisis:

European Leaders Deal Directly With Debt Dilemma

BRUSSELS — With a new sense of urgency, the leaders of the 27 European Union nations grappled directly on Sunday with their thorniest financial and economic problems, and made progress that they promised could yield a complete package of measures within days.

The hope is that the seriousness of the leaders’ effort to finally solve the interrelated problems of Greek debt, weakened banks and a bailout fund in need of reinforcement will keep speculators at bay when the financial markets open on Monday morning. But now there is heavy pressure on the leaders to deliver the goods at their next meeting, set for Wednesday.
There are three reasons that I've gotten a slightly sinking feeling as I've been reading news reports about the progress that was made this weekend.

1. The EFSF. The heart of the matter to be decided is how to increase the resources available within the EFSF to support the sovereign debt markets for Spanish and Italian debt. That has always been the most difficult part of the puzzle to build, and based on reports from this weekend, we still seem to be no closer to knowing what approach they will agree on, or even if they will be able to agree in the first place. At least eurozone leaders did use impressively vigorous language to reiterate that they are indeed determined to reach an agreement. So that's something.

2. Bank recapitalization. Eurozone leaders have decided that EU banks will need a capital injection of €108bn:

Banks must find €108bn in new capital

Europe’s big banks will be forced to find €108bn of fresh capital over the next six to nine months under a deal to strengthen the banking system that is to be unveiled by European Union leaders.
This seems low to me. The IMF has estimated that the EU's banking system will take a hit of closer to €200bn as a result of the debt crisis, and I would have been somewhat relieved if the EU had agreed on a number closer to that. €108bn may be enough money, particularly if there's a robust and significantly large mechanism put in place to defend the Spanish and Italian sovereign debt markets, because in that case banks may actually realize relatively few losses on those bonds. But a larger bank recapitalization promise would have provided reassurance that eurozone policy-makers understand the scope of the problem and are willing to get ahead of it, rather than simply trying to fix things as cheaply as possible.

3. Common purpose. Or more accurately, the lack of it. Everything I've read about the forthright but also acrimonious debate this weekend suggests to me that European leaders continue to be focused primarily on making sure that their own country pays the smallest share of the costs possible. No one has stepped up as an advocate for the common project of the euro. No country has taken on the leadership role of being willing to accept a higher burden of the costs for the common good. And now it is clear that no one is going to. Without any sign that the eurozone's political leaders are going to change their mindset and think first about the collective good and second about their own country, I am left with the feeling that the delays and inadequate responses to the crisis will continue. With each country narrowly focused on its own parochial interests, a resolution to the crisis is still certainly possible; but the brinksmanship that it will involve will make it difficult for financial markets to feel soothed by the process.

A crisis of confidence such as this can be resolved when financial markets are persuaded that policy-makers will do absolutely everything necessary to ensure that worst-case scenarios never come to pass. Unfortunately, this weekend's Brussels summit provides us with more evidence that instead of being willing to do whatever is necessary to avert catastrophe, Europe's political leaders are going to continue to try to do the minimum possible to contain the crisis.

So now we wait for their next meeting on Wednesday. And hope that their estimate of the mimimum possible will be enough.


  1. VerySeriousSam2:00 PM

    " No country has taken on the leadership role of being willing to accept a higher burden of the costs for the common good"

    But this is decided since long. By far the highest burden, in absolute and relative terms, is on German taxpayer's shoulders.

  2. Not in relative terms, I would argue.  The German taxpayer has paid less per person in euro terms than many others, and certainly less as a fraction of income.

  3. soolebop12:17 AM

    there's a leverage effect to the 108 billion bank re-cap with fracitonal reserve banking that's over a trillion dollars.. no?

  4. Edmundo1:29 PM

    The unsolvable problem of the Eurocrisis is one of leadership.

    Each country is looking out for itself, nad whilst as intelligent agents they are all concerned to keep the Euro afloat, each one is seeking to give away as little as possible to the rest of the community.

    So they will inevitably settle on the most parsimonious slution that has a chance of success.

    Until one of those slim chances pays off, the will continue kicking the can down the road.   Odds on, the final last chance will not pay off, and the world will have to live with abroken Euro.

    What is needed is the firm leadership to decide that this time, overkill is to too much of a solution.  Put it firmly to bed once and for all, accepting that it needs a no risk high cost solution.  Which won't happen.

    So the rest of the world are about to be firmly hung on their own hooks.  Does each of them have its own plan for Euro failure ready?  It is not as if there has been no warning.   Come Thursday, any non European economy that does not already have a plan for Europe's lack of a plan is no better than Europe.

    So who will make the grade, and who will not?