Financial markets move at lightning speeds that contrast
sharply with the slowness of the European political process.
Whether politicians and financiers can bridge the gap in coming
weeks likely to decide the fate of the euro.
The signals coming out of this weekends annual
meetings of the International Monetary Fund and World Bank were
not positive. Bankers and officials alike stepped up pressure
on euro area leaders to take bolder and faster steps to prevent
the blocs sovereign debt problem from spinning out of
control. U.S. Treasury Secretary Timothy Geithner urged
European governments to create a firewall against further
contagion, while Bank of Canada Government Mark Carney
said governments needed to amass about 1 trillion ($1.35
trillion) in firepower more than double the blocs
existing 440 billion bailout facility to
overwhelm the crisis.
European officials stuck to their current script, however,
insisting that the group needs to focus on ratifying an
agreement struck by EU leaders in July to increase the
flexibility and effective size of the bailout fund, the
European Financial Stability Facility. The German Bundestag is
due to vote on that agreement on Thursday (September 29), and
parliaments in skeptical Finland and the Netherlands also need
to give their assent in coming weeks. No one wants to put
ratification in jeopardy by talking about additional government
support for the periphery before that accord is adopted.
German Finance Minister Wolfgang Schäuble offered a
bracing message of German tough love in a speech to the
Institute of International Finance, a banking lobby that meets
alongside the IMF meetings. European governments were
determined to defend the euro, he said, but he offered no hint
that Berlin was ready to stump up more money. Instead, he said
states with excessive debts need to aggressively pursue fiscal
austerity and economic reform. And he rejected the view put
forward by the IMF itself this week that too much deficit
reduction by countries like Germany and the U.S. in the short
term would worsen the economic slowdown and make debt problems
even more intractable.
We wont come to grips with economies
deleveraging by having governments and central banks throwing
literally even more money at the problem,
he said. You simply cannot fight fire with
In the short term, markets are worried about Greeces
spiraling mountain of debt, which will exceed 150 percent of
GDP this year, and waning political support for austerity in
Athens at a time of deep economic recession. Bruce Kasman, J.P.
Morgans chief economist, told an IIF panel that the
current EU-IMF economic program has pushed Greece into a
recession more severe than Argentinas a decade ago and
would drive its debt up to more than 190 percent of GDP by the
end of this decade; its arguable that the country would
be better off leaving the euro, he suggested, an option that
remains anathema for EU officialdom. Greece is insolvent
and the European monetary union and the EU as a whole needs to
deal with it, Kasman said. It hasnt come to
terms yet with how to deal with it.