Photo: Ibrahim Iujaz on Flickr
With the media outlook swinging from wildly positive to wildly negative on a daily basis and rumours spiraling out of control, it can be hard to tell exactly where things stand on the eurozone crisis.But let’s be clear: the eurozone crisis is NOT going to end anytime soon.
The EFSF expansion plan that is slowly being passed by countries across the euro area is surely a step in the right direction in tackling the crisis, but it will only stave off crisis temporarily. While the market may convulse with every piece of news about the plan that hits the wires, the fact of the matter is that
Even upon the July 21 announcement that the EFSF would be expanded to $590 billion, analysts, pundits, and even EU leaders were quick to acknowledge that this was not a final euro endgame.
The term “kicking the can down the road” has been overrused by pundits of late, but that is indeed the scenario. The current expansion plan — if implemented as expected — will not make the EFSF large enough to tackle the escalating expense of keeping troubled sovereigns afloat, nor will it bring confidence back to the banking sector.
At the end of the day, conditions in the eurozone and/or global economy have to deteriorate significantly in order to coax Germany into take drastic measures. The German public (or, at the very least, German politicians) has to realise the disastrous consequences of a eurozone breakup or a disorderly default in a euro country before it will renege on its anti-euro stance.
Most — if not all — of the endgame solutions that have been proposed right now are not amenable to German voters, let alone some of the smaller countries like Slovakia and Estonia that can block coordinated eurozone resolutions. Strengthening the European Monetary Union in a way that is sustainable for the region would likely require amending the German constitution. And even now, any plans to increase the size of the EFSF without relying on fancy accounting will have to be approved by national parliaments.
The longer this crisis drags on, the more vulnerable the banking sector will become and the more costly it will be to recapitalize. Experts — from J.P. Morgan’s strategy team to BTIG’s Dan Greenhaus — have agreed that bank recapitalization will be key in restoring confidence to markets.
Yet new reports about a possible increase in the haircuts private creditors will have to shoulder and denials about banks’ fragility bely a disregard for banks that simply wasn’t present when the U.S. instituted TARP in 2008.
Until the situation worsens significantly, EU leaders are unlikely to agree to the terms of a recapitalization, which would either cost their taxpayers money directly or, more likely, require their nations to surrender some of their sovereign powers to a united Europe.
Or maybe the rest of the world will just get so fed up with the tanking global economy that the BRICS or G20 will step in.
A eurozone endgame will only be implemented when the euro is teetering on the edge of a precipice.
The fact remains — we’re just not there yet.