Only a bit more than a month ago, the leaders of the euro zone were happily congratulating themselves on overcoming their differences and cobbling together a second bailout of troubled Greece. The package, which includes 109 billion euros ($157 billion) in fresh loans from an EU/IMF bailout fund, was supposed to rebuild investor confidence in the monetary union and alleviate mounting pressure on debt-heavy Greece. But it has done neither. The euro zone debt crisis intensified after the deal, turning up the heat on giants Spain and Italy. And now, bitter infighting within the zone threatens to derail the entire Greek bailout package. If the deal can’t be rescued, the failure would deliver a blow that would sink Europe deeper into financial turmoil.
What’s the problem? The continued disputes over the second bailout of Greece highlight just how difficult it will be for the euro zone to resolve the debt crisis and solidify its monetary union. The very structure of the union allows too many parties with too many conflicting interests to have too great an impact on policies that impact the future and stability of the entire euro zone. Until the leaders of Europe find some more efficient method of making and implementing decisions, it is hard to envision the euro zone ever escaping from its life-threatening trials.
The case of Finland best shows us how flawed governance in the zone really is. The government in Helsinki, which leans against continued European bailouts, agreed to the second Greek rescue on the condition that it receive collateral for renewed financial support. Subsequently, the Finns and the Greeks worked out a special side deal in which Athens would deposit a chunk of cash in an escrow account for Finland to ensure Helsinki’s support for the bailout. (If that arrangement – Greece putting up cash to get more cash – doesn’t make any sense to you, that’s because it doesn’t.) But that bilateral deal quickly fell apart. Germany opposed it, while other euro zone nations, including Austria and the Netherlands, understandably demanded the same privilege as Finland. The Finns won’t back down on their demand, and euro zone finance ministries are still haggling over what to do.
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The Finland debacle exposes the fundamental flaws in the management of the monetary union. What it reveals is how the domestic politics of any one euro member, no matter how small, can have ripple effects through all of Europe and, in fact, threaten the survival of the euro itself. The Finns insistence on collateral could tank the entire rescue package. Under euro zone rules, the governments of all 17 members have to approve the details of the bailout before funds can be released. That means tiny Finland, which would be contributing a mere 2% of the guarantees for the rescue, could block the entire arrangement. How this gets resolved is a complete unknown. Can Finland be allowed to opt out of the bailout? Will other euro zone countries also insist on receiving collateral, defeating the purpose of the entire bailout?
What we do know, however, is that the consequences of a collapse of the Greek bailout deal would be severe. If the euro zone states can’t agree on a rescue for Greece, how would they ever come to terms on a deal to bail out a bigger economy like Spain? A failure of the second Greek bailout would completely undercut what little investor confidence remains that the euro zone leadership can support other indebted members in a time of crisis, implement much-needed reform to the entire monetary union, or stand behind its pledge to protect the euro.
Domestic political issues are emerging elsewhere in Europe as well that can potentially undercut the zone’s efforts to resolve the debt crisis. German Chancellor Angela Merkel, for example, is facing mounting opposition within parliament to a plan to expand the capabilities of the euro zone’s $1 trillion rescue fund – a reform analysts believe is crucial to help Europe combat contagion. Fear of a political uprising at home have also squelched any hope that Merkel will support the formation of a eurobond jointly backed by the governments of the monetary union, a tool many see as an important method of stabilizing the debt crisis.
(PHOTOS: Panic on the Streets of Athens)
Meanwhile, the Greek bailout is being threatened in other ways. Part of the package is a bond swap, in which private holders of Greek government bonds would exchange them or roll them over for bonds with longer maturities, easing the pressure on Athens. The scheme was supposed to be “voluntary,” but policymakers were counting on it getting done anyway. Well, as you can imagine, the “volunteers” aren’t exactly lining up to join the program. There are concerns that several large German banks and agencies holding billions in Greek bonds have not yet declared if they will join the swap program. The Greek government, meanwhile, has warned it would scrap the entire scheme if fewer than 90% of the private investors sign up.
So what does all this mean? The squabbling over the second Greek bailout shows just how unlikely it is that Europe can solve its greater problems. The political structure of the euro zone is just not designed for either crisis management or achieving fundamental reform. More importantly, the political will, never strong enough to begin with, seems to be faltering even further. The members of the monetary union simply are not committed enough to that union to make it work. If the euro members can’t agree on the Greek bailout, can they achieve the greater integration necessary to solve the zone’s problems, which would require even bigger sacrifices? As the euro debt crisis rolls on, I become ever more doubtful that it can ever be resolved.