Photo: Melissa O’Donohue on Flickr
Expectations are way down for this week’s second high profile EU summit, but that still doesn’t mean we’ll see nothing of substance come from tomorrow’s meeting.It seems pretty certain that the resolution will contain few numbers and will not go far enough to truly stem the crisis.
The European Banking Authority called for emergency stress tests of European banks just a few weeks ago, and since they have not yet been made public, it would make sense that EU officials are still analysing the data. Consensus among EU leadership is that bank recapitalization needs to amount to about €110 billion ($153 billion), but analysts are thinking those numbers should be far bigger.
Every plan we’ve seen to leverage the EFSF beyond its current €440 billion in resources has come up short. Analysts particularly agree that the two plans being considered right now — insuring first losses on new PIIGS bond issuances and using an SPV to get aid from the IMF or sovereign wealth funds — as well as the €1 trillion ($1.4 trillion) that’s expected to make available is just not going to be enough to stem the crisis for good.
But unless you were drinking the Kool-Aid, these are things you knew a long time ago.
The media and market hype has been overwhelmingly optimistic for the kinds of solutions the EU is actually capable of making. Add that to the fact that French President Nicolas Sarkozy and German Chancellor Angela Merkel said they’d have a fix “before the end of the month.” But since when did anyone actually start believing EU leaders, who have let this crisis fester for two years?
We will see some important steps forward:
– First, we’ll probably see a temporary fix. Just because the numbers aren’t there doesn’t mean there won’t be some kind of plan mapped out. In fact, giving numbers that rest on certain market conditions and intangibles sound comforting, but it’s also short-sighted to think those numbers will be definitive anyway.
– One thing EU leaders probably will have been able to decide on is bigger private sector involvement in the bailout. We’re thinking 50-60% haircuts, with questionable coercion to get creditors to participate. Not only does this constitute a far more sustainable solution for Greek debt, it will also escalate pressure on vulnerable banks.
– This may not sound like a good thing, but if that pressure is too steep EU leaders will be forced to devote more money to the banks than they were planning, particularly if they don’t already have a number in mind. It’s not a permanent solution, but an increased likelihood of contagion means that a more thorough solution will be necessary sooner.
– Finally, talk of changes to EU governance are a step down the road to fixing Europe’s problems. True, we’re unlikely to see anything but a proposal at this point. However, that doesn’t mean we won’t see some credible progress towards fixing the problems of the eurozone. In the past EU leaders have only slapped a band-aid on an infected wound. Treaty changes and alterations to governance mechanisms are the only way to truly kill the germs behind this mess.
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