The euro zone is not in crisis. It is far worse than that.
"Crisis" implies a fiasco, trauma or tragedy – some sort of turning point for the worse – that can end or be resolved fairly quickly, if with great pain. General Motors and Chrysler were in crisis. They skidded into bankruptcy, shed massive amounts of debt and emerged in fighting form a few months later. Goodbye crisis, hello profits. The Japanese earthquake and tsunami were crises of the saddest kind. Japan is rebuilding.
And the euro zone? "Crisis" does not cut it. This is a slow-motion suicide made gorier by feckless political leadership. It is now morphing into a banking crisis, one with the potential to plunge the European and global economies into a full-blown recession or worse. Even as the problems intensify by the day, as they have since 2008, there is no credible plan to save the euro zone from debt-induced destruction.
This puts the European Central Bank, the one institution in the 17-country euro zone that works, in the spotlight. If the ECB is not allowed to do its job while politicians dither, the euro zone is sunk.
European leaders should be embarrassed ("If I was a politician in Europe, I would commit suicide," Russian oligarch Vladimir Potanin said the other day). For them, the reality of the horror is only now just setting in, about two years too late.
Or is it? In Italy, the new centre of the debt hurricane, Prime Minister Silvio Berlusconi has been in denial about his country's potential to shred the euro zone. He still may be. Note that his austerity program – too little, too late but at least finally approved – focuses on tax hikes instead of taking the axe to the bloated civil service, virtually guaranteeing that the euro zone's third-largest economy will sink into recession, damaging the recoveries of all countries around it.
In France, President Nicolas Sarkozy has avoided a credible fiscal cleanup act because his popularity ratings are sinking ahead of next spring's general election; tough austerity programs do not attract votes. German Chancellor Angela Merkel is all over the euro zone map. She professes to be the champion of the currency yet continues to slap down the one idea – euro bonds – that make sense.
Compare the euro dithering to the U.S. government's reaction to the financial crisis unleashed by the collapse of Lehman Bros. exactly three years ago. Henry Paulson, the Treasury secretary at the time, and his successor, Timothy Geithner, ordered the banks to take emergency loans from the Federal Reserve. They did. Then came the Troubled Asset Relief Program, which authorized the Treasury to buy up to $700-billion (U.S.) of clapped-out assets, such as dud real estate loans, from financial players. Somehow it worked and the markets were spared a global banking disaster.
In the euro zone, there has been no such bold moves, just inadequate and delayed reactions to sovereign bailouts and fixing the banks. It happened again on Wednesday, when Bank of France governor Christian (What Crisis?) Noyer said France's banks need no outside help. Never mind that they're getting downgraded, have lost more than half of their market value in the past six months and are having trouble tapping into the interbank lending market.
At some point, the euro zone leaders will have to decide whether to end the common currency project and revert to national currencies, which could be devalued – sovereign states that print as much money as they want don't go bust – or go for full-bore fiscal integration, complete with euro bonds. There is no middle ground.
But the euro zone can't move that quickly. The journey from the Treaty of Rome in 1957, which established the European Economic Community, to the launch of the common currency took more than four decades. The euro zone doesn't have four years let along four decades to figure out which option is best. But it does need some time.
Enter and re-enter the ECB, the euro zone's chief firefighter. It has been buying the sovereign bonds of distressed countries and, recently, has almost single-handedly kept the enormous Italian bond market alive. It will have to keep its buyer-of-last-resort status intact. It will also have to keep providing the banks with unlimited liquidity in exchange for collateral.
The emergency bailout fund, the European Financial Stability Facility (EFSF), comes equipped with €440-billion ($687-billion Canadian) in state guarantees. It will have to be enlarged and leveraged up. Between a fatter EFSF, ECB bond purchases and unlimited liquidity to banks, the euro zone collectively has trillions of euros of financial firepower at its disposal.
Unless these resources are used, the euro zone will implode quickly, creating a global economic horror show. Hosing out trillions to keep the beast intact while a credible strategy is put in place to build a euro zone that can sustain shocks, like the bankruptcy of insignificant countries like Greece, is emerging as the least awful option.
Eric Reguly