Former Fed Chairman Alan Greenspan went even as far as to claim that The European Union is doomed to fail because the divide between the northern and southern countries is just too great, former Fed Chairman Alan Greenspan told CNBC. Meanwhile eurozone leaders gathered in a summit Wednesday — the fourth in less than a week — out of which they had hoped to issue a firm line to address the financial crisis that has now reached its 21st month. Meanwhile — and more importantly — the German parliament voted overwhelmingly to bar any further expansion of European bailout structures that might require a greater contribution by Germany.
There were three specific topics on the summit’s agenda. First, a major bank repair effort whose approval, it is hoped, could turn Europe’s damaged financial institutions into a source of strength, rather than a weakness. Second, a write-down of Greek debt — by at least half — that would give Greece’s economy a chance to recover, rather than drowning in interest payments. Finally, the summit was intended to seek an expansion of the eurozone bailout fund that would give the latter the ammunition to assist — if not directly underwrite — the broader European recovery effort.
Of the three, only the first goal solidified, and even then only in part. While reports late in the day suggest that a voluntary write-down of 50 percent of the value of Greek bonds has been agreed to by bondholders, the exact details of the plan are not clear. Meanwhile, the Europeans agreed to increase banks’ capital adequacy ratios — the amount of cash that banks must hold in reserve — up to 9 percent by June of 2012, something that EU leaders estimated will cost about 100 billion euros. Considering that by the EU’s own numbers that reaching that degree of a security blanket would cost — conservatively — 200 billion euros without even pretending to address the banking sector’s other problems, the agreement fell well short of offering a comprehensive solution to the financial problems facing Europe. On the questions about Greek debt and about bailouts for struggling sovereign states, the Europeans asserted that they had “reached agreement,” but put off any specific decisions until the next major summit.
Europe’s financial crisis thus is getting worse by the week. What started nearly two years ago with Greece’s sovereign debt crisis has since spread to a half dozen countries — even affecting European heavyweight France — as well as most of the Continent’s major banks. What has not spread is the willingness of any particular European state to apply the necessary volume of resources to address the crisis. In fact, as the vote in the German parliament shows, even in the face of financial collapse there is little desire to take the steps necessary to save the structures of modern Europe.
Such reluctance is understandable; the price to stave off Europe’s crisis is remarkably high. It is estimates that an effective attempt to tackle the European crisis would require bailout resources of about 2 trillion euros. Simply arriving at the current level of to around 1 trillion euros required a strenuous effort.
The European Central Bank (ECB) does not have full authority over monetary policy and banks in a manner similar to the U.S. Federal Reserve, the Bank of England or the Central Bank of Paraguay. When negotiating the Treaty on Monetary Union, European states reserved control over their own banks, ceding the least amount of authority possible to the ECB. The system was only sustainable — politically, economically and financially — as long as everyone was profiting. With the arrival of multiple debt crises and banking crises and considering a languishing global export market, the kind of economy that allowed this system to work is gone and unlikely soon to return.
Considering Europe’s political and economic disunity, the EU’s host of financial and institutional shortcomings, the sheer size of the problem and the ever-increasing pressure on governments and banks alike, perhaps the most notable outcome after a week of largely failed summits was that the eurozone remained intact. However, on the floor of the German Bundestag on Wednesday, it was made abundantly clear that the one country that might have the financial resources to resolve the crisis will not be sharing them. Neither the common currency nor the common market can exist in a Europe in which the union’s members are unwilling to share burdens and follow collective rules. Germany at present is focused on the rules, while the countries in need are focused on the burdens. Both approaches are correct in their own way, yet both are wrong.
Despite failing to articulate the specifics of any credible financial resolution to Europe’s debt crisis, this was about as good of a political response as Europe could hope for given the circumstances. By alluding to — but not mandating — a restructuring, no crushing pressure has been put on the banks, yet. By not announcing the details of how the European Financial Stability Facility will be expanded, European leaders have denied critics for now the opportunity to proclaim failure. That Germany, the one country whose participation is required in any solution for Europe, is pursuing its own interests in such a brash manner does not bode well for Europe’s future.
Conclusion: Whichever actions Germany takes, three things seem all but inevitable: an Italian bailout, a European banking crisis, and a Greek default. Any one outcome will likely trigger the other two.
Those betting on a euro breakup however, believe that the inflation-phobic Germans will never permit large-scale bond purchases by the European Central Bank — the policy known in the United States as quantitative easing. But this needs to happen to bail out not only the Mediterranean governments but also insolvent banks — including German banks — throughout the euro zone.
And I believe this ultimatly will happen. This would mean that the European monetary union survives, albeit with a gloomy future of higher unemployment for southern Europe and higher taxes for the North.
But the fate of the European Union itself will be very different. The creation of the single currency — obeying the law of unintended consequences — set in motion a powerful process of European disintegration. The fact that not all 27 E.U. members joined the monetary union was its first manifestation. Today we have a two-tier system, with 17 member-states sharing the euro, but 10 other states — notably Britain — retaining their own currencies.
The result is that key decisions today — particularly those about the scale of transfers from core nations to the periphery — are being made by the 17, not the 27. But the 10 non-euro members may still find themselves on the hook to help fund whatever combination of bailout, haircut and bank recapitalization the 17 decide on. They may also face more stringent financial regulation or a financial transaction tax, ideas that are much more popular in Berlin than in London.
This is an unsustainable imbalance. If the euro countries are intent on going down the road to federalism — and they don’t have a better alternative — the non-euro countries will face a stark choice: giving up monetary sovereignty or accepting the role of second-class citizens within the E.U.
Under these circumstances, the logic of continued British membership in the E.U. looks less and less persuasive. British public opinion has long been deeply Euro-skeptic. If it came to a referendum, as many Conservatives would like, Britons might well vote to leave the E.U. And under Article 50 of the Treaty of European Union, withdrawal would simply need to be approved by a qualified majority of E.U. members.