Sarkozy mad 311 R.
(photo credit: REUTERS)
The European Union summit held Thursday was rightly billed in advance as a
critical event in the history of the European project and, in a different
sphere, for the well-being of the global economy. For once, the hype was not
overdone, and it appears from initial reports that the huge expectations that
built up toward this event have not been disappointed.
issue facing the European leaders was the imminent insolvency of Greece, a
member of the EU and of EMU, the European Monetary Union known to the general
public via its common currency, the euro.
This insolvency found fullest
expression in the bond market, where the prices of Greek government bond prices
have been spiraling ever lower and hence the yields on them ratcheting steadily
higher, to the point where a few days ago, two-year bond yields were approaching
40 percent, and 10-year bond yields offered nearly half that level, if anyone
could be found to buy them.
These extraordinarily low prices and high
yields were the market’s way of telling the world what the European political
and economic leadership would not openly admit: Greece could never repay the
mountain of debt it had accumulated, and its bondholders could expect to lose a
large chunk of their money.
However, the fact that Greece was the
beneficiary of a massive bailout program as recently as May of last year, which
had supposedly covered the country’s borrowing needs through 2013 – and yet it
was now back demanding a second bailout at better terms than the first – was
only part of the EU’s problem. In the course of these past 15 months, and
especially in the last few weeks, the much-feared contagion – the spreading loss
of confidence from one country to another – had occurred across Europe. Along
the way, Portugal had been forced to ask for its own bailout package. But far
more serious was the recent collapse in Spanish and Italian government-bond
prices and the parallel jump in their yields toward and even beyond the level of
6% per annum for 10-year bonds. This signaled that the crisis was rapidly moving
from the small, peripheral economies to the larger ones – and even to the heart
of the euro zone, as the French markets began to be sucked into the vortex of
Thus the task facing the leaders of the member countries of the EU
was much greater than merely to bailout Greece again, although even this has to
be done in such a way as to minimize the resultant losses to the European
banking system. Their true goal was to save the entire EMU project and possibly
the EU itself, at least in its current form.
The only way they could do
that was to recognize that the monetary union launched in 1999 was fatally
flawed by dint of its being only a monetary union and not a full economic union.
If Greece was to be saved, its banking system had to be bailed out and its
finances restructured, which was far more than it could manage on its own. It
had to be an EU operation, backed by the full power and clout of the entire
union. Only that way would the message be sent – and be believed – that the EU
would give its all to protect itself and all its members.
The way this
has been done is complex in its details but simple in essence. The EU will
create mechanisms (or expand existing ones) to buy the debt of crisis-bound
member states and will recapitalize their banks. In return, it will effectively
take full control of the economies of those states and will also exert much
greater control over all the economies of all its members. In other words, the
EU has taken a giant step toward full economic union. As noted, the alternative
to going forward was to withdraw or be forced into retreat, with potentially
However, even this belated display of political
determination – while making a stark contrast to the continued partisan politics
in Washington – may be insufficient. There are major financial and economic
issues arising from the proposals agreed to Thursday, and these details may
cause major problems. Certainly, the initial reaction of the financial markets
was one of great relief, as is natural. But some analysts were quick to point
out the potential pitfalls. Yet these issues are ultimately secondary. Far more
important is the fact that on Thursday the leaders of the EU committed their
countries and citizens to a great leap forward in the European project, without
consultation or explanation; other than that, the alternative was unthinkable.
Whether the peoples of Europe, including the richer countries such as Germany,
Holland, Finland and Sweden, let alone the ever-recalcitrant British, are
prepared to go down this path, and pay the price in terms of both money and
sovereignty, is quite another matter.
Even if the markets “buy in” to the
deal and give the EU time to make it work – something that will become clear
within days or weeks – the true test will be political. It will be measured by
how many of the leaders who made Thursday’s agreement will still be representing
their countries at an EU summit next summer.[email protected]