09/12/2011: On European diets and Euro defibrillators

The difficult task for someone, who writes editorials for a weekly publication edited on Fridays, is that politicians have the unfortunate habit to come up with big decisions on weekends. Hence many outcomes speculated upon at the end of one week might be completely out of question at the beginning of the next one. We are currently once again at such a juncture. I am writing my editorial on this Friday 9 December, while European politicians are meeting for a summit, which might be again labeled summit of last chance.
Since Greece ignited the fuse of the European crisis eighteen months ago we had already numerous summits of last chances and plans to once and for all solve the crisis. Carole Sirou, the head of France research at Standard & Poor’s, mentioned on Monday in the aftermath of the rating agency’s announcement to put under review 15 of the 17 Eurozone countries, the eighteen European summits over the last two years, each of them disappointing investors, as one major reason for this decisions.
Churchill once said about Americans that they will always do the right thing, but only after exhausting all other options. Under pressure from rating agencies, with interest rates increasing, social tension mounting, impatient markets ready to sell all European sovereign debt, including the German one, we hope this time Europeans act like Churchill’s Americans and come with a credible solution. But what would a credible solution be?
I like to compare the Eurozone with a very heavy man, who is in the middle of a heart attack, surrounded by doctors, who are telling him that he should go on a diet and lose some weight. While this is a very sound advice in the longer run, which everyone would agree with, it is not tackling the fact that just in this moment the patient has a heart attack and that a shock from a defibrillator would be an appropriate mean to make sure he’s not dying.
It is clear that a long term solution of the Euro crisis is needed in the form of more fiscal discipline, which implies both more austerity and loss of sovereignty from the Eurozone countries. But such a plan, which President Sarkozy and Chancellor Merkel alluded to last Monday is incomplete without tackling the short term issue of stopping the Eurozone contagion; more concretely of ensuring that interest rates on the sovereign debt of Eurozone members, which haven’t bee rescued so far are not reaching unsustainable levels. Here only one institution could do the trick, the European Central Bank, either directly or indirectly through the International Monetary Fund, the European Financial Stability Facility or a yet to be created new institution.
If we get those two elements in the plan than it could give a relief, which would last longer than the ones the last plans achieved but we would just be at the beginning of solving the whole crisis. If we don’t get those elements or something close to it in one form or another, than we should brace for markets, which might again run havoc.A diet without defibrillator will be not credible to stop the crisis in the short run. A defibrillator without a diet will be not credible to solve the crisis in the long run.