Watching the euro zone crisis is like watching a dysfunctional family come together at the holidays. They gather with the best of intentions and the highest of hopes, yet every meal or touch football game in the backyard presents another opportunity to act out the same old destructive dramas—mom loved you more, I worked harder while you had it easy, etc. Everyone has their own personal narrative of the truth, to which they are completely wed.
So it is with the Eurozone, as dysfunctional a family as any. For starters, there’s very little trust between the members. You can see this in the pitifully inadequate rescue proposals that have emerged from this latest European Union summit. One part of the plan requires EU countries to loan the IMF money from their own coffers, so that the Fund’s bailout power (and the prospects of the Eurozone) will be bolstered in such a way that non-European countries will then want to then contribute money to the IMF’s European bailout efforts.
(MORE: Why Europe’s Downgrade Matters)
Follow that circular logic? Few people do.
Let’s put aside the obvious problems with this plan, which is that major non-European lenders like China have wisely said they want nothing to do with European debt (they are too busy buying up Europe’s best companies on the cheap). The key take away is that European nations are ambivalent about their own prospects (hence wanting to hedge the risk with outsiders’ money), and doubtful of each other’s commitment to saving the monetary union.
The ambivalence is reflected in other, more insidious back door measures as well. Consider the recent reports that Germany’s Bundesbank has been quietly lending hundreds of millions of euros to the ECB. The ECB is now in turn funneling that money into beleaguered European banks, with the hopes that those institutions will use at least some of it to buy up European debt, thus helping stabilize the sovereign situation.
True, some European banks, like the state owned French giants, have bought euro debt under government pressure, but for most private institutions the question would be – why? There’s no credible euro rescue plan yet, and Europe’s highest ranking officials, like the new ECB head Mario Monti, are publicly contemplating the details and likely outcome of a Eurozone collapse (think 1930s redux). Does that make you want to buy Italian bonds? No wonder stocks have become the new bonds.
The bottom line – Europe doesn’t believe in itself. As is the case with so many dysfunctional families, it fights about petty things (like concessions for the UK financial industry or non-governmental treaty escape clauses for France) while a large truth goes unacknowledged. Europe, led by Germany, is rich enough to buy its way out of this mess. It doesn’t need the IMF. And it certainly doesn’t need to use the ECB as some kind of discreet back door to avoid acknowledging that the Germans are picking up the bill. But it doesn’t have the stomach to do that yet. It doesn’t have the stomach to admit that a true solution to the euro crisis will involve richer countries taking responsibility for weaker ones, and debtor and creditor nations alike signing over true fiscal control to a central union, most probably one with the ability to transfer revenue to wherever it’s most needed (as is the case in the U.S).
Back in August of last year, I wrote a Time magazine cover story entitled the Decline and Fall of Europe, in which I posited that the only way out of the Eurozone crisis would be for Germany to whole heartedly back the debt of the weaker European nations, along with Europe’s banks, in exchange for a true economic and political coming together of the Eurozone with Eurobonds and a common fiscal policy. Sad to say, that story is as right today as it was five months ago – and we’re still no closer to a resolution.