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Darrell Delamaide's Political Capital Archives | Email alerts
April 12, 2012, 11:10 a.m. EDT
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By Darrell Delamaide
WASHINGTON (MarketWatch) "” Even in slow motion, it's still a train wreck.
The popular metaphor for the euro crisis as a slow-motion train wreck has perhaps contributed to the illusion that it won't be as messy and harmful as a crash in real time.
But reality reasserted itself in markets again this week as it became clear that Spain will probably miss its deficit targets and the European Central Bank's effort at a back-door bailout can't make up for political malfeasance. Read the latest market news from Europe.
With a few notable exceptions, European politicians in the past several decades have consistently shown themselves incapable of looking beyond their own parochial interests to demonstrate anything like leadership.
Janet Yellen, the Federal Reserve's No. 2 official, made the case for sticking to the central bank's low interest-rate policies and said the Fed might need to take additional action to bolster the economy. Jon Hilsenrath has details on The News Hub. Photo: AP
A joint European currency /quotes/zigman/4867933/sampled EURUSD +0.6394% , and perhaps even a European Union, has little place in such a world. The national interests are too diverse to support a structure that was designed to contain German dominance on the continent but only diverted it into a different channel.
Just how it will get sorted out is anybody's guess. But it seems increasingly likely that rather than evolving forward into a United States of Europe, the EU will devolve into a looser affiliation similar to its earlier incarnations.
Despite being the main beneficiary of the current structure, Germany appears to lack the political will or leadership to drive the continent forward toward greater unity.
This may not be such a bad thing. It's never been clear that the unitary state model of the U.S. would be the right one for a continent with a long history of strong and diverse regional cultures.
Whether Europe goes forward or backward remains to be seen. What's clear is that it can't stay where it is.
And yet that seems to be the goal of German Chancellor Angela Merkel and other top leaders in Europe. While Merkel pays lip service to the notion of greater fiscal union, she is unwilling to take even the obvious baby step of joint euro bonds.
Having embarked on the path of forging unity through a joint currency, underpinning that with a collectivized debt regime would seem to be a logical next step. It would help resolve the current crisis and advance European integration.
Merkel and crew have rejected joint euro bonds out of hand, however, evidently afraid of embarking on an open-ended collectivization of European debt and subsidizing inefficient economies that would lose any incentive to improve.
But there are some constructive proposals out there that would avoid these consequences. The financing would not be open-ended but tied to a "redemption fund" that would allow a restructuring of the euro zone's excess debt over a manageable period, such as 20 years.
This is the plan revived by the Boston Consulting Group in a paper late last month entitled "Fixing the Euro." Read the BCG paper.
BCG says that the scope of the problem is too great to be solved by the European Stability Mechanism or the medium-term injection of liquidity by the ECB.
Using consensus, if arbitrary, measures of sustainable debt "” 60% of gross domestic product for public-sector debt and 90% for private-sector debt "” the consulting group estimates excess public debt at 3.7 trillion euros ($4.8 trillion) and excess private debt at 1.4 trillion euros ($1.8 trillion).
These amounts clearly exceed the capacity of the ESM and related facilities, recently expanded to 700 billion euros, or the liquidity aid of the ECB, which will probably be capped at the current 1 trillion euros or so.
For the BCG experts, there is no alternative to the "devastating consequences" of a collapse of the euro zone other than a restructuring of the excess debt through the issue of long-dated joint euro bonds. They draw on an earlier proposal by the German Council of Economic Experts for a "redemption fund," which would limit the amount and maturity of the joint bonds and provide a mechanism to enforce fiscal discipline. Read the proposal of the German Council (in English) .
So Merkel has a genuine solution to the euro crisis at hand if she could muster the courage to throw her considerable political weight behind it. Europe can go forward or backward "” the choice is largely in her hands.
Otherwise, the EU and its common currency seem to be headed off the rails.
Darrell Delamaide writes about politics that affect markets. Currently based in Washington, he spent two decades as a foreign correspondent in Europe, stationed in Paris, Bonn, and Berlin.
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Darrell Delamaide writes a weekly column on politics that affect financial markets. He has written for Barrons, Dow Jones, Institutional Investor, Bloomberg... Expand
Darrell Delamaide writes a weekly column on politics that affect financial markets. He has written for Barrons, Dow Jones, Institutional Investor, Bloomberg and others over a long career, and has been based for the last 10 years in Washington, D.C. Collapse
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