October 22, 2011
Europe's Options are Few, and Shrinking
Berlin, The world's hopes that Europe will resolve its debt crisis in a bold stroke are running into a stubborn reality: Solutions that work on paper are often unattainable in a euro zone of 17 sovereign countries.
Euro-zone finance ministers met in Brussels Friday, ahead of a European Union summit on Sunday, to grapple with the disagreements that are holding up the promised "comprehensive package" to tame the crisis. Those include rifts between the most important players—Germany, France and the European Central Bank—over how to beef up the euro zone's bailout fund and how deeply to restructure Greece's crushing debts.
Even if leaders do enough to avoid a financial meltdown, resolving the deeper causes of the debt crisis—which include economic disparities that Europe hasn't figured out how to redress within the euro framework—is likely to take years, analysts and officials warn.
"Europe is staring at a lost decade," says Simon Tilford, chief economist at the Center for European Reform, a London think tank. Years of economic stagnation with persistent fears of sovereign and banking-sector defaults "will have a considerable impact on the broader international economy," he says.
Behind current policy divisions lie profound political and institutional constraints that limit what Europe can do to stop a collapse of confidence in its single-currency zone that is threatening to undermine fragile economic growth worldwide.
Markets and policy makers agree that a grand plan is needed. But a number of factors are restricting the euro zone to small steps: the limits of solidarity between the 17 nation-states that make up the euro zone, the cautious culture of the bloc's central bank, the reluctance of national governments to overhaul their economies except under duress, and a lack of financial elbow room even in Europe's core economies such as France.
Despite high expectations that a solution will result from Sunday's summit, European leaders are already dampening hopes and saying that a second summit on Wednesday will be required, WSJ Brussel bureau chief Steven Fidler reports on Markets Hub. Photo: Reuters.
"We are not really showing a properly functioning leadership," Luxembourg's Prime Minister Jean-Claude Juncker said on arriving in Brussels for Friday's negotiations. Europe's divisions over its crisis response are sending out "disastrous" signals to markets, he said.
Renewed hopes that euro-zone leaders would make progress this weekend lifted financial markets on Friday. On Thursday, German Chancellor Angela Merkel and French President Nicolas Sarkozy spooked markets by admitting they won't be able to agree on anti-crisis measures by Sunday and will need a second summit, planned for next Wednesday.
People familiar with the negotiations said Germany and France remain so far apart on key issues that Ms. Merkel couldn't get a green light to sign a deal from her increasingly assertive parliamentarians.
France is pressing for euro-zone governments to turn their joint bailout fund into a bank that can borrow money from the ECB, greatly amplifying its firepower, a step that the ECB and Germany reject.
Germany is insisting that Greece's private-sector bondholders take a big hit to reduce Greece's debt to a more sustainable level, a proposal that France and the ECB are resisting for fear that it could accelerate bond investors' flight from Southern Europe.
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