The cancelation of a summit of Euro-zone leaders, who were expected to meet to discuss lifting the lending capacity of the European Stability Mechanism, signals that no quick deal can be expected on this crucial decision.
Financial markets move fast. Democracy, especially the type of democracy practiced in the European Union, moves much more slowly. While nervous investors are treating the European debt crisis like a car crash proceeding in slow motion, Eurozone leaders, handcuffed by domestic politics, seem hesitant to take evasive action before they run off the road.
The latest decision to delay came earlier this week when members of the Eurozone decided to postpone a meeting tentatively scheduled for Friday that would have discussed building a stronger financial firewall to prevent the debt crisis affecting countries in Europe’s periphery from spreading. The meeting was expected to hash out important details, especially the size of the bailout fund. Also presumably on the agenda was whether money from temporary bailout programs would be combined with the European Stability Mechanism (ESM), a permanent rescue funding program, to boost the amount of cash the Eurozone would have to throw at the debt crisis.
Countries outside of the Eurozone certainly think bigger is better when it comes to funding the ESM. In a February 26 communiqué following a meeting in Mexico City, the G-20 said that the Eurozone countries would have to bolster their own bailout mechanism before non-European G-20 countries agreed to provide more cash for a planned global rescue package for Europe. British Chancellor George Osborn summed up the sentiment of many G-20 members when he bluntly stated “Until we see the color of their money, I don’t think you are going to see any money from the rest of the world.” Brazilian finance minister Guido Mantega went one better, tying Brazilian help to getting Eurozone assistance for IMF reform. “Emerging countries will only help under two conditions: first that (Europe) strengthen their firewall, and second for the IMF [voting rights] reform to be implemented,” he said.
While the rest of the world wants to see an ESM bolstered by funds from temporary European bailout programs, some Eurozone countries have little enthusiasm for such a move. Germany, in particular, is skeptical that a larger bailout fund will be a good thing. Earlier this week, embattled German Chancellor Angela Merkel managed to push a €130 billion ($174 billion) bailout package for Greece through the German legislature, but only with the help of opposition lawmakers. Polls show that over 60 percent of Germans oppose more aid for Greece, and many Germans fear that enlarging Europe’s rescue fund will send a message that Eurozone countries with poor fiscal discipline can expect a bailout.
Ironically, without Germany’s willingness to bailout Greece, both investors and the Euro would be in even worse shape. When a Greek default looked increasingly inevitable last year, money flowed out of European bank stocks as people braced for a full blown European banking crisis. With Germany, along with other Eurozone countries, signaling their willingness to send more money to the struggling Greeks, investors know Eurozone members are willing to bite the bullet to avert potential disaster for the Euro.
More importantly for the banks, European Central Bank (ECB) President Mario Draghi is flooding the Eurozone with cheap money to avoid a credit crunch. Since taking office in November, Draghi has increased the ECB’s balance sheet by about half a trillion dollars, making himself a popular figure by providing banks with two rounds of liquidity injection over the last three months. According to a recent Credit Suisse report the ECB’s strategy seems to be working. With the exception of Greece, bank deposits have risen in Europe’s troubled periphery since the first dose of liquidity late last year, and European banks have been buying up Eurozone government debt, most notably in Italy and Spain. Bank lending was also up in January, with lending to households leading the way.
The ECB’s bold action and the painful, but necessary, decision to continue providing money to Greece are two legs of a three-legged stool that will help the Euro weather the current crisis. The third leg is the creation of a well-funded ESM. Unfortunately Eurozone politicians do not have the relative freedom of Draghi and have spent their political capital rescuing Athens. However, at some point they will realize that a stool with only two good legs is inherently unstable, and if they want a return to business as usual they will eventually have to create the type of permanent bailout fund that satisfies both investors and the G-20.