We must accept euro project was badly designed
If the single currency is to survive, European monetary union needs a major overhaul, writes Colm McCarthy
Published 09/10/2011 | 05:00
Angela Merkel's acceptance on Wednesday of the need to recapitalise European banks suggests that a comprehensive solution to the eurozone banking and sovereign debt crisis is being contemplated, at least in Germany. How to implement a package decisive enough to end the crisis has long been clear and extra capital for banks is a key component. The other components are an admission that Greece is insolvent and must default, and credible measures to prevent contagion to the bond markets of remaining eurozone countries, particularly Italy and Spain, which can avoid sovereign default if effective supports are provided.
It appears that the spur to the German chancellor's announcement was the realisation that a Greek default, which would trigger huge losses for numerous European banks, is now inevitable and cannot be announced without accompanying bank recapitalisation measures. The final necessary component in a solution, support for the devastated sovereign bond markets, can also be addressed through the expanded European Financial Stability Facility (EFSF), new forms of support from the IMF and a more decisive backstop to the bond market from the ECB. Rebuilding confidence in the sovereign bond markets will limit the amounts needed for bank recapitalisation, since the banks are heavily exposed to sovereign bond values.
Implemented decisively, and with clear commitment to follow through, these measures would finally deliver on the repeated promises from political leaders to " ... do whatever it takes to save the euro ... ". Thus far they have produced fumbling half-measures and have converted a serious banking crisis in 2008 into a sovereign debt meltdown across half of the eurozone, and a bigger banking crisis, in 2011. An important lesson from the US response to the banking crisis in late 2008 and early 2009 is that decisive and rapid interventions cost less than slow dithering.