Debt crisis resolution evades European leaders
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As October 23 came and past, the 27 European Union nations grappling to heal Greece’s mushrooming debt crisis missed their targeted deadline for consensus.
The past week or so has not been pretty. When talks between German Chancellor Merkel and French President Sarkozy stalled, Sarkozy delayed joining his wife in the labor of their baby to fly to Berlin. According to the New York Times:
One big issue remaining to be decided is how to make the stability fund, now set at 440 billion euros ($606 billion), large enough to cover Spain and especially Italy as well as Greece and the smaller troubled countries of the zone. Germany has been firm in rejecting a French idea to turn the bailout fund into a special-purpose bank backed by the European Central Bank, arguing that doing so would violate European treaties, so another approach is needed.
Amidst the chaos, Spain’s housing market took the brunt of the country’s downgrade and Standard and Poor’s threatened to downgrade France, Spain, Italy, Ireland and Portugal should the European economy not recover. Bloomberg reports, “‘Ballooning budget deficits and bank recapitalization costs would likely send government borrowings significantly higher under both scenarios,’ S&P analysts led by Chief Credit Officer Blaise Ganguin in Paris wrote in the report. ‘Credit metrics would deteriorate sharply as a result.’”
The New York Times argues this economic chaos added urgency towards the European Union’s October 23 meeting:
Two factors especially drove the urgency of the meeting, which had already been postponed once: the worsening situation in Greece, where strikes and protests erupted last week, and the rising cost for Spain and Italy to borrow money, a sign of mounting speculative pressure. Washington also put considerable pressure on European leaders to make decisions before the Group of 20 summit meeting in early November, because the long euro crisis is straining the global economy.
Though France and Germany were unable to work out their differences, Sunday’s meeting showed some signs of progress. The New York Times described the successes:
Despite the friction, concrete progress was made. The leaders reached overall agreement on recapitalizing Europe’s shaky banks, which they decided required an extra 100 billion Euros. They agreed that banks should first raise what capital they can privately, and then turn to their own governments if necessary. If those governments already have debt problems, then the bailout fund, called the European Financial Stability Facility, could be drawn upon, but only “as a last resort,” Mrs. Merkel said.
The White House tried to weigh in and encourage compromise, but was poorly received due to our own struggling economic and heavy debt burden:
“It doesn’t look much better in America, even if the markets aren’t quite concentrating on that,” Merkel said today.
“This will be the message for the coming years,” Merkel said. “It will be very, very hard — our task is no longer to live beyond our means. That goes for Germany and for every other European country.”
Reading between the lines, one would argue the same task awaits the United States.