A deserted building site in Dublin: Ireland’s request for easier payment terms on its €90-billion bailout was rejected.
Remember the European debt crisis? Last year, it flashed through the euro zone like wildfire, leaving Greece and Ireland in flames and setting off smoke alarms in Portugal and Spain. Then Tunisia, Egypt and Libya erupted, and Japan was hit by a devastating earthquake. Europe's debt woes promptly disappeared from view.
They will return this week, when the finance ministers of the euro zone - the 17 European Union countries that share the euro - make final preparations for the crisis-fighting package that is to set the agenda at the two-day EU summit in Brussels beginning March 24.
The outline of the agreement is already in place and should move forward, though no one is ruling out last-minute glitches. That's the good news. The bad is that the crisis is both financial and political, and the political side of the equation could ultimately sabotage the efforts to refloat the EU's debt-swamped victims. Many voters in the wealthiest EU countries, notably Germany, still have no desire to extend charity to countries, such as Greece, that lived well beyond their means.
The fix-it package has some notable features. The first is extra firepower for the main bailout fund (the one used to rescue Ireland), called the EFSF - European Financial Stability Facility. Earlier this month, the euro zone leaders vowed to raise the fund's effective lending capacity to €440-billion ($615-billion), up from €255-billion. The goal is to deliver the message to currency "speculators" that the EU has enough financial firepower to prevent a run on the euro.
Flexibility is to be added to the bailout fund. For instance, it might be used to take up any sovereign bond auction slack instead of waiting until the ailing country is incapable of rolling over its debt before swinging in to action.
Still another feature will be an overhaul of the Stability and Growth Pact (SGP), the notoriously ineffective EU policy that was supposed to limit budget deficits to 3 per cent of gross domestic product and national debt to 60 per cent of GDP. Most EU countries greatly exceeded those targets.
How the "debt brakes" of the SGP's successor will be enforced, and how much leeway will be built into them, is still undecided and presents a hornet's nest of problems. Some countries will no doubt argue for get-out-of-jail-free cards. "Rome's usual criticism of the debt brake is that states with low private-sector debt (in this case Italy and Belgium), could be allowed some leeway," Deutsche Bank's London economists said in a recent note.
Now the tricky part. Just because a new crisis-fighting package is coming together, doesn't mean it will work or not fall apart down the road. Saving Europe is a question of political will, not just topping up the bailout fund and urging zombie banks to bolster their capital bases.
Take Ireland. It's already in a bad mood about the package because its request for easier payment terms on its €90-billion bailout was rejected. Why? Because Germany and France insisted easier terms would come only if Ireland were to boost its exceedingly low corporate tax rate. Ireland considers the rock-bottom rate sacrosanct because it attracts desperately needed foreign investment.
Irish Prime Minister Enda Kenny's political defeat on bailout terms was made all the more bitter by Greece's success in persuading the EU to shave a full percentage point off the cost of its own bailout loans.
German Chancellor Angela Merkel has even more political problems than Mr. Kenny. The bailouts of Greece and Ireland were deeply unpopular among German voters. While Ms. Merkel has reluctantly backed a larger bailout fund, she's insisting on tough reforms among the euro zone on debt and deficit reduction, budget oversight and other measures, such as lifting retirement ages.
Ms. Merkel's conservatives soon face state elections. As euro skepticism rises in her country, she must tread a fine line between supporting the weak countries and, in effect, punishing them for profligate fiscal behaviour. At some point, her balancing act may fail. If it does, the euro zone crisis will double or triple in intensity. The euro zone's healthy future is by no means assured.
Eric Reguly