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Economy

Europe's Leaders Are Staring Into An Abyss (But At Least They See It)

Analysis: Bad news is that the euro zone's crisis and Greek (and other) debts are even deeper than previously estimated. Good news is that France's Sarkozy and Germany's Merkel have begun to face the crisis with the honesty and

Greeks last year protesting austerity cuts (PIAZZA del POPOLO)
Greeks last year protesting austerity cuts (PIAZZA del POPOLO)
Cerstin Gammelin

The latest summit in Brussels marked a turning point in the euro crisis that has been raging for two years now. For the first time, the denial of Europe's leaders about the true gravity of the situation seems to finally be lifting. The only solution is to throw even more billions at the problem – and even that is only going to buy time while sustainable rescue measures are developed.

If such a thing as a "mirror of truth" had existed in the European debt crisis, this weekend was the first time European leaders dared to look into it. What they saw was worse than all negative expectations. At the crisis's epicenter, Greece, shock waves are greater than ever. The situation isn't much easier in Italy or Portugal. It is crystal clear that the timid steps of politicians seeking to cover their own national interests are no match for the historic endeavor of rescuing the world's second-largest currency.

The report of "Troika" inspectors from the International Monetary Fund, the EU Commission, and the European Central Bank reads like a horror story. It also calls into question all of the previous attempts to rescue the euro.

Despite all these efforts, Greece has never been closer to bankruptcy than it is right now. In fact, the Troika report confirms that the credit programs instigated by the currency union heads of state and government have only fanned the flames.

A country with no money and ailing industries is not in a position to pay high interest rates on loans without adding to its pile of debt. In a worst-case scenario, Greece would over the next few years require an additional 444 billion euros to get back on its feet – and it would still be very far from being able to meet the euro club's debt regulations.

Beyond the Greek problem lie far larger ones: for example, the fundamental question of who is still in a position to help whom, and how. The math shows that a viable rescue package for Athens alone would work out to about 1,400 euros per citizen in each fo the other 16 euro countries.

Nobody really believes that the inspectors really saw the bottom of the financial hole. Plus, other countries are quite simply not in a position to take on more debt to help the Greeks. Euro zone countries have for quite some time now been in violation of the euro club's stability regulations, and there is no way to stretch them further. The idea after all is to diminish the debt load so as to win back the confidence of citizens and financial managers.

The grip of the European Financial Stability Facility (EFSF) – even expanded, as it has been – is not wide enough to deal with such a massive sum. In its present form, the fund would run out of money before it could start working properly. Nor would there be anything left over for other cramped countries or banks, while investors speculating on the end of the euro marched merrily on.

Too fragile and too slow

And this is the second thing that got hammered home over the Brussels summit weekend: the EFSF can pretty much pack up its bags and go if it isn't overhauled completely. The construction of the fund is not only too fragile, but it's too unwieldy because decisions are designed to be of a political nature.

Every euro country has the right of veto, and the rating agencies also possess enormous influence over it. If heavyweights Germany or France lose their Triple-A ratings, so does the fund. That in turn will frighten off investors, many of whom barely understand its complicated structure, and who in any case, in times of crisis, stick to AAA.

Leaders at the summit recognized that the EFSF only remains viable if private creditors share in the costs of the Greek crisis. Banks, insurers and funds will have to brace themselves to lose at least half of the nominal value of their Greek bonds. Otherwise, a handful of speculators betting on Athens's bankruptcy will make millions within minutes. Talks about the write-offs will be coming up.

And finally, the weekend revealed a third truth: that if the EFSF is to survive, the funds at its disposal must be increased. There can be no more debating the issue of whether or not leverage, a risky financial trick, is necessary. In view of Greece‘s debts and the vulnerable situation of the southern European countries, the only question can be how, not if the fund is boosted.

And one thing cannot under any circumstances be overlooked: no matter how much money is mobilized, it's not going to save the euro. It will only buy time so that fundamental issues can be tackled and solved.

The economic drifting apart of the 17 euro countries has to be stopped. And because time is becoming more and more expensive, the summit has to introduce real changes on Wednesday – among them, announcing the installation of a powerful and independent budget commissioner. Berlin, by insisting on changing the EU contract first, is running the risk that the slide of the euro becomes a crash.

Read the original article in German

photo - PIAZZA del POPOLO

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