Don’t expect America’s big overseas trading partners to clean up their act anytime soon. The latest European Union summit ended with no clear winners or losers other than possibly German taxpayers. German Chancellor Angela Merkel made concessions to Italian Prime Minister Mario Monti, with both presenting the move to greater union as if it were a win-win. It’s only a victory for the political class because the root causes of the Continent’s crisis remain unaddressed.
Going into the meeting, interest rates on Italy’s debt spiraled. Spain was wracked by a banking collapse that even $125 billion in bailout cash can’t fix. With assistance from French President Francois Hollande, the Italian and Spanish leaders succeeded in getting Mrs. Merkel to agree to letting the European Stability Mechanism (ESM) lend directly to banks in need of recapitalization. In addition, the ESM will be able to lend to governments facing escalating interest rates such as Italy and Spain, which have been stuck selling bonds to finance their big spending.
The money will come with strings, including the establishment of a centralized banking regulator, who almost certainly will be under German control. The concession of direct lending will be limited by the fact that no additional funds were allocated to the ESM, and much of its current $650 billion allocation is spoken for already. Germany also got the growth pact it wanted and, for now, has put the idea of eurobonds - a way to pass off borrowing costs to German taxpayers, out of the running.
After the summit results were announced, Italy saw a drop in the interest rate of its 10-year bonds to below the danger point of 6 percent, to 5.83 percent. This results in significant savings for Italy, which needs to sell about $35 billion in debt monthly to stay afloat. The agreement gives Italy a small breathing space, but it won’t restore the nation’s economic health.
Europe’s unemployment rate is sky-high, with youth unemployment averaging 40 percent in some countries. Mr. Monti and Mr. Hollande need to undertake serious reforms if their countries are to start growing again. Mr. Monti is pushing real spending cuts now and is hoping to put off a scheduled increase in the value-added tax. Bureaucrat jobs are expected to drop eventually by 200,000. France, where almost a quarter of jobs are in the public sector, needs to move rapidly on similar reforms as its debt level is 90 percent of gross domestic product, which is where drag on growth sets in.
The euro crisis extends beyond the banking sector. It is a debt crisis fueled by states living beyond their means for too long. Bank debt is many times the sovereign debt of the countries in trouble, and these efforts to forge a closer union might well leave German taxpayers stuck with the bill.
The Washington Times