This could well be the week the eurozone crisis advances toward a credible resolution. We have heard this before, so it is too soon to exhale, but if all goes according to plan, a way through Europe’s currency and economic crisis could be announced at a summit of E. U. leaders this Friday.
The pieces of a plan have fallen into place just over the past several days. On one side of the deal, the inflation-obsessed European Central Bank appears to be prepared to ramp up its purchases of bonds issued by E.U. members. This would stabilize bond yields, reduce the cost of borrowing, and give ailing nations such as Greece time to implement the kind of persuasive economic reforms the markets have been shouting for.
The other side of the deal involves an agreement among E.U. governments to accept binding measures to make budgetary discipline among E.U. members enforceable. In an appearance before the European Parliament last week, Mario Draghi, the new president of the E.C.B., signaled an easier stance toward bond purchases than his predecessor, Jean-Claude Trichet. But Draghi made fiscal discipline among E.U. members sound like a quid pro quo for the central bank to alter its policies.
The outstanding question this week is just how the E.U. fashions its new rules. French President Nicholas Sarkozy favors a deal among the 17 E.U. members using the euro that short-circuits any need to amend the European Union’s treaties. The advantage here is simply the swiftness with which a plan can be developed and executed. Draghi, demonstrating the uncertainty surrounding this issue, called simply for a “new fiscal compact” among eurozone governments.
But German Chancellor Angela Merkel told the Bundestag last Friday that she was determined to negotiate changes in the E.U.’s treaties, which would require all 27 members of the E.U. to sign on. Her phrase for what she wanted was a “fiscal union.” Merkel and Sarkozy are due to meet in Paris Monday.
There are other potential stumbling blocks. For one thing, the E.C.B. is forbidden by its constituting mandate from financing government debt. Critics of the plan say this bars the bank from making the kind of debt purchases an effective plan would require. At the moment the E.C.B. purchases about €6 billion to €10 billion in government bonds per week—vastly below what a rescue of the euro would entail.
However, the E.C.B. can do what it wants so long as it is in the interest of monetary policy. And the bank itself determines the reason for its bond purchases.
Another question mark is the International Monetary Fund. The I.M.F. is also likely to provide some of the funding required for a full rescue. While such funds would be obviously welcome, the fund’s participation will draw China and other emerging economies into the picture, and Beijing, for one, has already made clear that it will help out in Europe, but at a price by way of its influence at the fund.
Despite these unknowns, the significance of last week’s developments is clear. We are now beyond the point of wondering whether the euro can survive and deep into the “how” of the matter. Before this past week, most commentators were giving better than even odds that the currency union would sink.
As to the means, this columnist stands with Chancellor Merkel. The issue at stake—a fiscal union, not just a currency union—is going to transform the nature of the E.U. profoundly, bringing it significantly closer to a full federal system. It is better to take care of the treaties now, when maximum certainty is needed, rather than put the matter off. As to the question of speed, once the markets see serious negotiations under way, they will be satisfied that a solution is coming.
One caveat: We have been on the brink of solutions before, awaiting the summit that will resolve all. At this point such cliff-hangers are part of the E.U.’s history. This week’s meeting has a better chance of success, however. The euro zone crisis began to threaten the core two weeks ago, and as some analysts said at the time, that was bound to get everyone’s attention. And so it has.
We’re not out of the danger zone yet, either. There are many vulnerable banks in need of help, and the financial markets, while they have greeted recent developments positively, remain as nervous as they have been for most of this year. It’s no time now for European leaders to flinch.