Europe’s disastrous summit

By Felix Salmon
December 9, 2011

I thought disasters were all meant to happen over the weekend? Somehow, in Brussels, EU leaders have contrived to pull defeat out of the jaws of victory on Thursday night, leaving Friday for finger-pointing and recriminations and wondering whether anybody who signed on to this deal has any chance at all of even getting re-elected, let alone being remembered as one of the leaders who saved the euro.

Remember how Wolfgang Münchau said that the Euro zone had to get it right at this summit or it would collapse? Well, the Euro zone has most emphatically not got it right. Take any of the list of prescriptions of the minimum necessary right now — from Münchau, from Larry Summers, from Mohamed El-Erian — and the one thing that jumps out at you, especially in light of the most recent news, is that if you look at anybody’s list, there’s an enormous number of items which has zero chance of actually happening.

Here’s how the FT put it on Wednesday:

It borders on hysterical to say there are but hours to save the euro, but there is a risk that if the crisis is not now tamed the price of a rescue might start to spiral out of politicians’ grasp. The stakes are therefore very high at Friday’s summit. The world cannot afford another half-baked solution.

And yet, inevitably, another half-baked solution is exactly what we got. Which means, I fear, that it is now, officially, too late to save the Eurozone: the collapse of the entire edifice is now not a matter of if but rather of when.

For one thing, fracture is being built into today’s deal: rather than find something acceptable to all 27 members of the European Union, the deal being done is getting negotiated only between the 17 members of the Euro zone. Where does that leave EU members like Britain which don’t use the euro? Out in the cold, with no leverage. If the UK doesn’t want to help save the euro — and, by all accounts, it doesn’t — then that in and of itself makes the task much more difficult.

But that’s just the beginning of the failures we’re seeing from European leaders right now. It seems that German chancellor Angela Merkel is insisting on a fully-fledged treaty change — something there simply isn’t time for, and which the electorates of nearly all European countries would dismiss out of hand. Europe, whatever its other faults, is still a democracy, and it’s clear that any deal is going to be hugely unpopular among most of Europe’s population. There’s simply no chance that a new treaty will get the unanimous ratification it needs, and in the mean time the EU’s crisis-management tools are just not up to dealing with the magnitude of the current crisis.

The fundamental problem is that there isn’t enough money to go around. The current bailout fund, the European Financial Stability Facility, is barely big enough to cope with Greece; it doesn’t have a chance of being able to bail out a big economy like Italy or Spain. So it needs to beef up: it needs to be able to borrow money from the one entity which is actually capable of printing money, the European Central Bank.

But the ECB’s president, Mario Draghi, has made it clear that’s not going to happen. Draghi is nominally Italian but in reality one of the stateless European technocratic elite: a former vice chairman and managing director of Goldman Sachs, he’s perfectly comfortable delivering Italy the bad news that he’s not going to lend her the money she needs. He’s very reluctant to lend it directly, he won’t lend it to the EFSF, and he won’t lend it to the IMF. Draghi has his instructions, and he’s sticking to them — even if doing so means the end of the euro zone as we know it.

And there’s more bad news, too. All of Europe’s hopes right now are being placed in something called the European Stability Mechanism — a permanent successor to the temporary EFSF. Since it’s permanent, the ESM is going to have to be constructed with the ability to put out fires of any conceivable size. And as such, it’s going to have to be able to borrow enormous amounts of money, and lend them on to countries which have found themselves in trouble.

But that would make the ESM, essentially, a bank. And the European leaders seem determined, today, to prevent the ESM from operating as a bank at all. Which means it will never get the firepower it needs to be taken seriously.

Oh, and did I mention that the ESM seems set to be capped at a mere €500 billion euros? That’s a lot of money, of course, but compare it to Italy’s total debt of roughly €2 trillion. And that isn’t even counting Spain, or Portugal, or Ireland, or whatever money Greece might yet still need.

Don’t think that Europe’s banks might be able to step in and lend their governments the money they need, either. The European Banking Authority, with exquisite timing, informed the world on Thursday that the continent’s banks need to raise €115 billion in new capital, including more than €15 billion for Spain’s Banco Santander alone. Where are they going to find that kind of scratch? Certainly not from their beleaguered governments. And there aren’t many private investors clamoring to invest in this particular train-wreck, either.

It all adds up to one of the most disastrous summits imaginable. A continent which has risen to multiple occasions over the past 66 years has, in 2011, decided to implode in a spectacle of pathetic ignominy. Its individual countries will survive, of course, albeit in unnecessarily straitened circumstances. But the dream of European unity is dissolving in real time, as the eyes of the world look on in disbelief.

Europe’s leaders have set a course which leads directly to a gruesome global recession, before we’ve even recovered from the last one. Europe can’t afford that; America can’t afford that; the world can’t afford that. But the hopes of arriving anywhere else have never been dimmer.


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I think the capital for the €115 BL is already there, on the bank’s balance sheets: it will come in the form of debt-for-equity swaps. It’s probably the only way to re-cap the system thoroughly at this juncture. And its going to be one ugly, rough affair.

Posted by Dr_Stonewafer | Report as abusive

‘Europe, whatever its other faults, is still a democracy’

Are you sure about that?

Technocrats appointed to run Italy and Greece?

I wouldn’t count on any European electorates being asked for their approval for any changes to any treaty.

Posted by SallyC | Report as abusive

I don’t think the Euro is quite toast yet. Italy and Spain aren’t in great shape but they are a hell of a long way from Greece.

It’s also pretty easy to recap banks as we found out with TARP. Lend to them short term at 0%, allow them to lend long to goverments at 2%(Germany) to 7% (Italy), and don’t let them pay dividends to their shareholders until their capital is whatever you want it to be. Not a quick fix but it works every time.

On 3/9/09 I promise you that Citi, BofA, MS, and a few other global financial giants were insolvant… they just weren’t illiquid due to the Fed’s extreem measures. Banks are actually really easy to save… countries are much harder.

The sticky issue that does need to be resolved is that the common currency allows the PIGGS to spend like their smarter and harder working European peers. A common currency naturally creates these distortions weither it’s Germany and Greece or Mississippi and Connecticut.

Posted by y2kurtus | Report as abusive

This is the best analysis of the EuroCrisis that I’ve seen in months.

Posted by USInvestor | Report as abusive

hi felix, i didn’t manage to finish reading all of your opinion
i’ll get back to it later – that is one of the fun features of your blogs, one needs only a paragraph to hear its echo for the next ten

but ian bremmer wrote a good analysis, recommended reading
note for felix – “no big fat cheque”

and dave cameron – what a disaster – a bit like the turkey inviting itself to christmas dinner
bless him, who better to consolidate europe than dave, reluctant high priestess for the city of london, his ineptitude made the summit a success

maybe we have a new adjective for political isolation – to be ‘camerooned’

Posted by scyth3 | Report as abusive

So here’s my question. With all of the gloom and doom over this summit, why are the markets shooting up today? Is it that equities have such a short term horizon? Seriously, I don’t understand.

Posted by spectre855 | Report as abusive

Analysis of the Euromess on this blog has been sorely lacking in insight. What is it, Felix, that you’d like to have seen the Euro leaders to have done? You should articulate a position clearly, rather than just criticise.

And cirticism is misplaced. It should have been very clear, well in advance of the summit, that there is nothing that the eurozone goverments could actually agree to that would solve the present crisis – which is a run on the periphery countries. Whether they would agree to a treaty permitting Eurobonds or whether they agreed to something lesser makes no difference in the short run. In the short run, whether Eurozone lives or dies is pretty much in the hands of the ECB -it’s the only institution in the world that can solve the “there are not enough euros” problem. The only point of this summit that I could see was to put countries on the path to closer fiscal integration such that ECB would drop its excessive worries over moral hazard and step up to the plate. If that does not happen, the summit is a failure. If ECB does step up, the summit is a resounding success. The noises from Draghi are thus far ambiguous at best, so I reserve judgment for now.

Posted by Y.Alekseyev | Report as abusive

A agreement to march a continent to the scaffold.
An absolute disaster.

Posted by JosephRyan | Report as abusive

Europe is a Union in name only. Germany has no intention of redistributing the wealth of the Rhine-Rhur basin to southern Europe. When finance is abstracted so far from reality it will always collapse back to a notion of the value of the underlying. The French banks are suffering now and the rest will follow suit. It doesn’t matter much whether you go fast or slow when you don’t know where you are going. The tab is being called in for the attempt at European renaissance and no one is willing to pick it up.

Posted by Rob_InTheCity | Report as abusive

Europe doesn’t have to bail out all of Italy’s 2 trillion euros of debt.

Posted by mjturner | Report as abusive

If Germany is going to push the fiscal profligacy delusion to the end, there’s really no solution, is there? Eventually, depression in the PIGS would have forced them out of whatever union could have come out of this summit, since there’s no way for their economies to grow without some inflation, and there’s no way Germany is agreeing to a new arrangement that will allow for inflation.

If the question is not if, but when some countries give up the Euro, is it better for them to drop out sooner or later?

Posted by AngryInCali | Report as abusive

The Czech press is reporting that to help prop up the Euro, their banking sector will have to put up a sum of money that is around 10% of their total bank holdings. The government is balking, saying that they will only make such a move if it is approved in a referendum.

There is no way that this can be held together, given the opposition around Europe.

Posted by NoahNehm | Report as abusive

Perhaps they could agree to abolish and replace the ECB. That should be popular.

Posted by MyLord | Report as abusive

“The sticky issue that does need to be resolved is that the common currency allows the PIGGS to spend like their smarter and harder working European peers.”

This is actually not true. The fact is that Ireland and Spain spent less than the Germans but they still got hit by the financial crisis. Best to use one’s intellect instead of one’s prejudices.

Posted by Heropass | Report as abusive

You really can’t blame the European leaders for this, the only leader against the rescue plan was the UK’s Prim Minister David Cameron who is trying to repair a split in his party. He claims he wanted an opt out for the UK on the Financial Transactions Tax (which wasn’t on the agenda) or there’s no deal to install checks and balances to control overspending in the Eurozone because he’d veto it.

So what happened? Cameron got no concessions, and 26 out of the 27 EU member states decided to set the agreement up between themselves anyway. So, not only did the UK gain nothing, but by walking away from the table Cameron has removed the UK from future discussions on economic matters that will affect UK growth, jobs and companies.

He’s also alienated the UK on the very outer fringes of the EU. When the UK needs friends, they’ll remember this moment and think again.

It isn’t the EU or the Euro that have been hurt by this, but the UK.

Posted by FifthDecade | Report as abusive

Europe’s “summit” will turn out to be a complete failure in the long term. The UK is lucky it escaped (for whatever reason). It’s amazing that some people actually want to join the “losers” on the Continent.

Posted by disqus786 | Report as abusive

The Euro never stood a chance from the beginning. The grand idea of a European Unites States missed the whole point of why the US works. Best it fail quickly and get the pain over with and everyone can move on.

Posted by h2000 | Report as abusive

If I were back in the UK, I wouldn’t be worrying about pissing off the EU countries who brought this collapse on themselves. They are the ones who will be needing the UK as a friend, not the other way around.

Posted by h2000 | Report as abusive

I agree on two accounts:
a) the measures taken are not even close to what we needed to put the EZ back on track: symmetric adjsutsment of current account surplus and deficit countries, and sovereign debt insurance by the ECB
b)Nobody can afford the disaster we are slowly making happen

But, there is a but. There actually is a good news. Pressed by emergency, the European leaders had no choice but to refuse to stand by the usual blackmailing by the UK. Reinforced cooperation is now reality, which means that if our leaders come to sanity, and decide to do what it takes, they now have a precedent, and they will be able to do it without the UK.

So let’s cross fingers: once we restore sanity, we are done! 9/a-first-impression-on-the-eu-summit/

Posted by fsaraceno | Report as abusive

Heropass, debt is not a snapshot; the trajectory is also crucial. Would you buy Spain’s debt with 20% unemployment and stagnating economy or Germany’s growing economy?

Best to use one’s intellect instead of one’s prejudices.

Posted by whywait | Report as abusive

Take a step back from the trees and consider the forest. Is it credible that the solvency of nations depends on a committee meeting? Or has that die been cast?

I think the latter. This is about some plot twists, the final chapter is known.

Posted by DonutBoy | Report as abusive

“He’s also alienated the UK on the very outer fringes of the EU. When the UK needs friends, they’ll remember this moment and think again. It isn’t the EU or the Euro that have been hurt by this, but the UK.”

Pray tell me just when has the EU ever been a “friend” to the UK?

Posted by mregl | Report as abusive

The UK are not a team player. As a result their membership was doomed from the start.
Like a spoiled child, they are only happy when they win all discussions/arguments. They think they are still in the Empire Period, when their opinion was the only one worth considering.
Europe is better off without the UK.

Posted by Basil2744 | Report as abusive

In the US, just before the collapse around 2008, all the pundits, the economic experts, people like the writer of this article were all commenting on how there was no end in sight to the great prosperity. People like me and my friends, non economists by trade or interest, were puzzled how home prices kept going up and we asked, there is no way home prices can keep this trajectory without wages also increasing and wages were not increasing. But who cared or listened, the party went on like gangbusters. Everybody was an “investor”. 2012, nobody can buy a house even if the interest rates are the lowest in years. I usually throw lots of salt when reading articles like these by experts like these.

Posted by ofilha | Report as abusive

I think the likelihood of the eurozone nations emerging from this cosy, sensible-sounding ‘fiscal compact’ with so much as the right to paint their own lamp-posts without EU permission is on a par with my chickens preparing cold fusion. This whole euro-crisis is a sham and a scam, deliberately engineered by the EU, through its policy of massive handouts and easy loans, to bring the eurozone nations to their knees so they would cry out for rescue at any cost. They will be rescued, but the eventual cost, without a shadow of doubt, will be the cessation of their existence as independent nations.

Are we seriously expected to believe that the massed ranks of expert EU economists were incapable of predicting the virtual certainty that such an ill-matched currency union would collapse? They knew full well it would only work under the aegis of a political union, which it was clear the people would never accept. So they came in through the back door. Those strutting on the EU stage may be buffoons, but the ones pulling their strings are not.

I have no idea of the financial and political implications of Cameron’s decision, but I’m sure I can safely say that few ordinary Brits would want to be ruled by these deceitful and callous dictators. And there can be little doubt that all the EU members will, sooner or later, be sucked down this euro plughole.

Posted by SleepyJohn | Report as abusive