Europes crisis solution might be too small. Can it think bigger?
Written by The Indian Express
3 min read
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On May 9,the European leaders finally did something about Greece. Recognising that the country was seriously illiquid and may be close to insolvent they agreed to set up the European Financial Stability Facility,or EFSF. It would be nice to add that the EFSF then swung into operation to contain the crisis,but,of course,that is not what happened: it had to be painfully ratified by all 17 eurozone countries,first,with each vote being a mini-crisis for local and continental politics. The Finns briefly looked like holding it up before they finally cleared it on Wednesday. Crucially,the German parliament,or Bundestag,passed it too,on Thursday.
There is little doubt that Europe needs at least the EFSF to combat its problems. Yet,it is the very minimum that could be done,and is probably already out of date unsurprisingly,as it was decided when the European sovereign debt crisis was at a much earlier stage. It provides a safety net of little more than 500 million euros,which might not be enough if pressure on the banks in northern Europe continues to increase. German banks are leveraged out at 30 times the size of their assets on average a number strongly reminiscent of Anglo-American investment banks in the earlier iteration of this crisis. As the banking behemoths of the continent deleverage,a giant stabilisation fund will be needed. It remains unclear where that money will come from.
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This crisis has painfully exposed the holes in the European project that many have warned of since the time that greater integration began to become a reality. The painfully slow pace of decision-making makes the complex system of European capitalism less able than others to react quickly to crises. And the decision to prioritise the coordination of technocratic monetary policy,via a common currency and central bank,while allowing few effective constraints on domestic fiscal policy,has been shown up for the economic fiction it always was. It is useful,therefore,to note that,even in the midst of crisis,Europe appears to be learning its lessons. The German chancellor and the European commission are also arguing about how to expand the decision-making powers of the centralised Council of States. And the European Parliament voted early this week to impose compulsory fines on those member-states that broke rules limiting their fiscal deficits and debt.
