Eurozone’s Fate Seen at Stake in Emergency Meeting in Brussels     Print Email

The prospect of a global financial panic caused by the fissures in the eurozone has finally concentrated the minds of EU leaders about the dimension of their problems and the need for action to replace stalling. As reported yesterday in a European Institute blog post, the first signs of this more determined, realistic approach emerged with the European Central Bank's decision to unconditionally buy Greek government bonds and the vote in Germany’s parliament to proceed with a bail-out for Greece.

Just how costly and risky the EU’s delays have been was dramatically demonstrated on Wall Street with a record-breaking day of market gyrations as world markets and the euro continued to slide.

Despite initial complaints from some pessimists about the failure of Jean-Claude Trichet, the ECB head, to go farther and open the bank’s window to all eurozone countries and not just Greece, leading independent analysts praised Trichet’s poise and strategy in refusing to commit more official resources now in a market downdraft.

“Smart policy-makers will calmly let the markets fall further, in order to benefit from the market rebound,” noted Simon Johnson, a former chief economist at the IMF. He was writing on his blog, The Baseline Scenario, ahead of an emergency meeting of eurozone leaders and, in a separate session, representatives of the G-7 in Brussels to confirm the bailout for Greece. Confronted with market panic, the EU leaders – with help from Washington – will have to wrestle with the growing likelihood of debt restructuring for several eurozone countries such as Greece, Portugal and Spain. The sooner EU leaders grapple with this agonizing prospect, the better the chances are that it can be managed in an orderly fashion.

Meanwhile, on the ECB’s role, the Financial Times editorialized that Trichet was right to ignore – for now -- the tempting-sounding option of offering to go further and simply buy up the sovereign debt of the vulnerable eurozone countries. Rather than rush to rescue, the ECB should let the IMF intervene first, as it has done in Greece, in order to put teeth into the austerity conditions imposed on governments that need bail-outs. An ECB “rescue” would further fuel voters’ revolt in Germany and other countries about having to pay for Greek mistakes. Thirdly, the paper said, it is enough that the ECB has gone as far as it has. Now it should keep its options open while investors start to re-assess the situation in the new context of more determined EU action this week.

Wait and let the euro drift downward to a point where it is undervalued and then, and only then, intervene, says Johnson. Because it is only at that point when intervention can shift the market, notably by punishing traders who stand to lose a lot of money, that they have gambled on a further decline in the euro’s value.

Before that moment arrives, Johnson writes, the key eurozone nations – lenders such as Germany and France and laggards such as Greece and Portugal – need to forge a common front about how to proceed to a collective debt restructuring, perhaps in the coming weeks.

For this radical and painful realignment to succeed, the EU will need help. The G20 can authorize the IMF to help Greece and other vulnerable eurozone countries to declare a standstill of their debt repayment, and G20 nations could pledge some financial support as a backstop for continuing and growing IMF and EU action to confront the deepening morass in the eurozone.

Washington could help politically and financially with this painful process. It is in U.S. interest to do so because a eurozone in free-fall can drag down global trade and destabilize international financial stability. As Bruce Stokes, a leading Washington commentator writes in the current issue of the National Journal (in the magazine’s subscriber-only content): The Continent’s economic struggle is already beginning to cast doubt on the Obama administration’s economic recovery strategy, which partially depends on a weak dollar to boost U.S. exports. Moreover, the wave of nationalism washing across Greece and Germany could reach other European countries and eventually undermine trans-Atlantic cooperation on a range of issues, especially dealings with Iran, Russia, and China.”

European Affairs