There’s no end in sight for Europe’s debt crisis - unless it is the end of the euro itself. The finance ministers of the 17 eurozone countries are meeting in Brussels this week, desperate to come up with a solution as Italy heads toward financial chaos. The world’s central banks, spearheaded by the Federal Reserve, are coordinating efforts to provide liquidity to global markets.
Investors are fleeing. Italy had no choice but to entice bondholders with a record 7.89 percent yield for three-year bonds, up from the high but still bearable 4.93 percent it paid as recently as October. The cloud of recession looms over the Continent, with the Organization for Economic Cooperation and Development slashing its prediction of Europe’s economic growth to 0.2 percent.
The European Financial Stability Facility (EFSF), as currently constituted, simply doesn’t have enough cash on hand to bail out Italy. So the scramble is on to shore up the EFSF and keep Italy from defaulting on its $2.5 trillion debt. That would take at least $1 trillion, and at least one finance minister already has said raising that much money is impossible.
That leaves only a set of “grand solutions” on the table for consideration at next week’s summit of European presidents and prime ministers. The eurobond, an option rejected by Germany, may raise its head once again. The new version of the plan requires treaty modifications designed to create a closer fiscal union. The resulting “stability union” would result in deeper fiscal integration, something presumably German chancellor Angela Merkel would find acceptable. Eurobonds would allow high-debt countries such as Italy, Greece, Spain and Portugal to borrow at a lower, common rate - all currently paying 5 percent to 7 percent or more. Germany, now paying less than 2 percent on its bonds, will be stuck paying more because the yield on the eurobond will reflect the risk of all the countries together.
The upside is that Germany would have more control over the fiscal policy of its more profligate neighbors. The downside is that it increases the European Union’s already large democracy deficit, concentrating power in the hands of the Euro-bureaucrats. Furthermore, if this fiscal union comes with eurobonds, it sticks German taxpayers with the bill for higher interest rates.
The International Monetary Fund (IMF) also may attempt to save these countries from the consequences of reckless fiscal policy. There are reports that the IMF is drawing up an assistance package of almost $800 billion for Italy. In addition, the IMF might extend a credit line to Spain. If that is the case, the United States, as the IMF’s single largest shareholder, will be involved in the bailout despite President Obama’s claim to the contrary.
The bottom line is that the eurozone countries have lived beyond their means for far too long. Short-term policies like the Fed’s efforts are not the solution here. Eurozone ministers OK’d a loan worth $10.7 billion for Greece, demonstrating their lack of seriousness about addressing their spending problem. We’ve already wasted far too much of our own taxpayers’ money bailing out U.S. banks. We certainly should not be helping bail out banks in Europe that lent unwisely to governments that spent unwisely.
Nita Ghei is a contributing Opinion writer for The Washington Times.