Feature

Euro zone on the verge of catastrophe

To avert an economic meltdown, European leaders began negotiating for a stronger fiscal and political union, one with authority over each of the 17 member nations’ budgets.

What happenedThe euro zone’s economic crisis reached a dangerous turning point this week, as confidence in the continent’s sovereign debt began to collapse amid warnings that leaders had only days to prevent a meltdown of Europe’s common currency. To head off that looming catastrophe, German Chancellor Angela Merkel, French President Nicolas Sarkozy, and other European leaders began negotiating the terms of a stronger fiscal and political union that would give central authorities power over each of the 17 member nations’ budgets. The deal might also include massive bond-buying by the European Central Bank, which would shore up investor confidence and drive down governments’ borrowing costs. Merkel has long resisted having Germany and the ECB assume a larger role in covering the debts of Greece, Italy, and other debt-ridden euro zone countries, but with financial panic now spreading to Belgium, France, and even Germany, pressure is mounting on her to act. Polish Foreign Minister Radoslaw Sikorski said that he might be the first Polish leader in history to say, “I fear German power less than I am beginning to fear German inactivity.”

Over the past two weeks, financial institutions around the world began refusing to lend to European banks and dumping as much European debt from their books as possible. Italy’s borrowing costs climbed to nearly 8 percent. France’s AAA credit rating may soon be downgraded, and last week, even Germany failed to sell nearly 40 percent of its sovereign bonds at auction, a signal that investors no longer consider the country to be a safe haven.

What the editorials saidOnly Merkel and Germany can save the euro now, said The New York Times. For months, as the debt contagion spread from Greece to Italy and throughout the euro zone, Merkel has stubbornly insisted that her country’s virtuous taxpayers would not pay for the sins of their “profligate neighbors.” She should remember that the “Southern European spending spree” she disdains helped enrich German exporters for so many years, said The Washington Post. Now the Germans have to return the favor by moving decisively to save the euro, or watch it—along with the world economy—veer toward collapse.

Merkel should not “fall for this global guilt trip,” said The Wall Street Journal. The Germans—and the also-affluent Dutch and Finns—understand that solving this crisis “requires more than a blank check.” If Greece, Italy, and other free-spenders see their borrowing costs fall and the crisis averted, they’ll lose incentive to clean up their acts. The best of the bad options Europe now faces is to create a fiscal union that forces everyone to “live by German-approved fiscal rules.”

What the columnists saidThis “crisis” was completely avoidable, said James Surowiecki in The New Yorker. In reality, Europe has “that rarest of problems—one that you really can solve just by throwing money at it.” The ECB has the financial strength to protect Italy, Spain, Greece, and others from the punishing bond markets, but it has decided, with Germany’s backing, not to step in for fear that it’s “morally offensive” to save the naughty countries from their irresponsibility. “Destroying the euro to teach a lesson,” however, makes little sense.

There is no longer a “painless solution,” said Peter Boone and Simon Johnson in Bloomberg.com. Even if the ECB “brings out the bazooka,” the euro zone’s most troubled countries will still face years of punishing austerity and anemic economic growth. All signs indicate that some countries will simply have to leave the euro. It’s only a matter of when, and whether European leaders “stall until markets force a chaotic end upon them.”

I give the euro until Dec. 9, said Wolfgang Münchau in the Financial Times. That’s when euro zone leaders will meet in Brussels to hammer out details of the stronger fiscal union Merkel now supports. Since the price of “a substantive agreement’’ will be the surrender of some national sovereignty, it’s not at all certain they’ll succeed. But another half-measure will not fool the financial markets for long. “The euro zone has 10 days at most,” and the clock is ticking.

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