THURSDAY, OCTOBER 27, 2011

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European Disunity Halts Solutions to Crisis

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 according to STRATFOR, 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 summits agenda. First, a major bank repair effort whose approval, it is hoped, could turn Europes 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 Greeces 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.

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.
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 EUs own numbers that reaching that degree of a security blanket would cost conservatively 200 billion euros without even pretending to address the banking sectors 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. Europes financial crisis is getting worse by the week. What started nearly two years ago with Greeces sovereign debt crisis has since spread to a half dozen countries even affecting European heavyweight France as well as most of the Continents 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 Europes crisis is remarkably high. STRATFOR 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 less than 500 billion 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 Europes political and economic disunity, the EUs 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 unions 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 Europes 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 Europes future.