Europe’s debt crisis: An uglier 2011?

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French President Sarkozy and other EU leaders talked fiscal crisis this week (Eric Vidal/REUTERS)

At this point in the never-ending euro crisis, it should be clear to Europe’s leaders that their piecemeal approach to the debt problems of the Eurozone’s weakest members has been a failure. Rescues for Greece and Ireland have not stopped the contagion. Moody’s recently threatened to downgrade its credit rating on Spain, and on Friday, lowered Ireland’s rating by five notches, even after that nation’s European Union/IMF bailout. Standard & Poor’s warned of a downgrade for Belgium. In a bond auction this week, Portugal’s borrowing costs nearly doubled in the just the past month. But that’s still not enough evidence to convince Europe’s leaders to change their policies.

In a summit on Thursday, European leaders agreed to form a permanent bailout framework, set to become effective in 2013. But once again, they dodged proposals for new approaches to the crisis. The continued resistance to more proactive, comprehensive solutions to Europe’s debt crisis will just make it more likely the Eurozone will continue to suffer bailout after bailout.

It’s not that Europe’s leaders haven’t been warned that this is where the Eurozone is headed. Recent days have seen an outpouring of criticism of the European Union’s haphazard policy towards the crisis. Here’s what Frank-Walter Steinmeier and Peer Steinbrück, two former German ministers, wrote recently in The Financial Times:

The time for stumbling through the euro crisis is over. Piecemeal approaches and wait-and-see attitudes are endangering European integration. We now need a more radical, targeted effort to end the current uncertainty, and provide stronger support for the future of Europe’s common institutions.

IMF Managing Director Dominique Strauss-Kahn has made repeated calls for a more comprehensive solution. This is what is said in a recent interview:

The situation in Europe is serious and economic recovery sluggish– and there is no silver bullet to fix it overnight. What the Eurozone needs is a comprehensive solution. Just as the resolution of the global financial crisis two years ago required a global approach, a European approach is now needed to resolve the problem of low growth in the Eurozone.

And this, from the chief executive of PIMCO, Mohamed El-Erian:

A liquidity approach that delays the day of reckoning may be good regional politics, but its bad economics. It does not restore sustainable growth to the periphery, and it exposes the core to contamination – be it through peripheral liabilities being transferred to the German taxpayer or the ECB’s (European Central Bank) balance sheet coping with by purchases and repos of peripheral bonds.

There has been no shortage of proposals Europe’s leaders could have examined. Italy and Luxembourg floated the idea of a Europe-wide bond. Even short-term possibilities weren’t considered, such as a Belgian idea to expand the size of the bailout fund cobbled together in May, or an ECB suggestion to use some of those funds to buy distressed sovereign bonds. There has been stiff resistance to any change in the current bailout system of dealing with the crisis – especially from Germany and other more fiscally austere northern European nations.

I can sympathize with Germany’s position. The German government doesn’t want to be responsible for the finances of its Eurozone neighbors any more that is absolutely necessary. But the shortsighted policies that have resulted are both bad politics and economics. The longer the debt crisis rolls on, the bigger the potential cost and burden on German taxpayers. The current approach is not helping the Eurozone’s most vulnerable members return to growth. It’s not making the core of the Eurozone any less vulnerable to contagion. It’s threatening the survival of the euro. And it is not making the future of European integration any brighter. Ire is rising in Europe towards Germany’s lack of leadership on the euro crisis. Luxembourg’s prime minister, Jean-Claude Juncker accused Germany of being “un-European” after it rejected the proposal for a European bond.

Hopefully, a little rest over the Christmas holidays will give the leaders of Europe a bit more perspective on where their monetary union is headed, and some enhanced willingness to do what it takes to ensure its success. Without that, Portugal will have a hard time avoided a bailout. Then the next domino is Spain, an economy so large that a rescue would test the resources – and the viability – of the Eurozone. Europe’s 2011 could be as ugly as its 2010 – if not even uglier.

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