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After no fewer than thirteen summits, has Europe finally solved its sovereign debt crisis? Maybe not.
BRUSSSELS, Belgium – So finally they did it. In the hours before dawn, European leaders forged a three-pronged plan of attack to be unleashed like Poseidon’s mighty trident on the monstrous euro-debt crisis.
Time, and the markets, will tell whether the EU’s “big bazooka” — including trillion euro firewalls, 100 billion euro write-offs and re-capitalizations, and an appeal for help from China — will slay the debt beast, or whether the multi-headed hydra will rise again out of its Greek heartland to strike Italy, Spain or Portugal.
The deal reached in the small hours Thursday morning certainly goes beyond any of the band-aid solutions patched together at the previous 13 European Union summits since the Greek debt crisis erupted in early 2010, threatening to plunge the world into another recession.
Key to the deal, private banks agreed to write off 50 percent of the money Greece owes to them — around 100 billion euros. To protect against further turmoil in the markets, the banks will also have to raise their capital by just over 106 billion euros. And the EU’s emergency bailout fund will be raised to 1 trillion euros to guard against the likes of Italy or Spain “going Greek.”
“These decisions are a major step forward to install a firewall that will prevent the crisis spreading to other members of the euro-zone and beyond,” French President Nicolas Sarkozy said after the all-night talks. “I think the whole world will greet them with relief.”
Certainly in the Olympian heights of Wall Street, Frankfurt, London and the other trading centers where the fate of the global economy is decided, reaction was positive to the EU deal. Shares rallied on Asian and European markets, and the euro hit a seven-week high against the U.S. dollar.
But will it last? Ephemeral market surges have followed EU summit decisions through the year, only to fade when details of the EU’s packages are unpicked. Amid the panoply of Greek mythological metaphors triggered by the debt crisis, the EU leaders’ work has most resembled the fate of King Sisyphus, condemned by the gods to perpetually push a boulder uphill, only to have it roll down again as he neared the peak.
After all, we’ve been here before. EU leaders told the world they had dealt with the crisis on other occasions — after granting Greece a 110 billion euro bailout; after rescuing Ireland and Portugal; after creating the 440 billion euro European Financial Stability Facility; or as recently as July, when Greece’s creditors were convinced to take a 21 percent “haircut” on their loans.
Each time, markets briefly jumped, but then the stone rolled back down the hill and the crisis deepened still further, provoking dark predictions of a euro zone meltdown, even the breakup of the EU itself.
German Chancellor Angela Merkel herself warned that Europe’s future was at stake as she sought, and got, a huge parliamentary mandate for strengthening the EU rescue package. “No one should take for granted that there will be peace and prosperity in Europe in the next half century,” Merkel told the Bundestag on Wednesday. “If the euro fails, Europe fails.”
Under the latest plan, which seemed to meet British Prime Minister David Cameron’s demand for a “big bazooka” to tackle the euro zone crisis, Greece’s debt will be reduced to 120 percent of the country’s GDP by 2020 thanks to the write down which reluctant banks were cajoled into by Europe’s leaders. That’s still double the EU declared target for euro zone countries, but better than the 180 percent which the country was headed towards.
The EFSF bailout fund will be leveraged in part by setting up a special investment tool to which private and public investors will be invited to contribute. Chinese investment is seen as crucial. Sarkozy said he will call Chinese leaders on Thursday to discuss participation. The issue will loom large at next week's G20 summit in the French Riviera resort of Cannes.
“In taking today’s decisions we lay the foundations for our future,” said Herman Van Rompuy, president of the European Council, who chairs EU summits.
Behind the grand statements, however, EU leaders know the crisis is far from over, and any number of dangers could derail the plan. Will the Greek government be able to maintain its draconian austerity program in the face of widespread public anger now the debt pressure has been relieved? Will other countries like Portugal and Ireland seek similar credit relief? Does Silvio Berlusconi have the political will and collation support to push through reforms to cut Italy’s 1.8 trillion euro debt? Can Spain handle mounting discontent with almost half its young people unemployed.
Most importantly, the EU has to do something to rekindle growth in stagnant southern European economies so that they start to pay their own way and get people back to work. Unless that starts to happen soon, EU leaders can expect more market agitation, more demonstration and more long nights of make-or-break summits in the months ahead.