The usual arrangement for the bailout of large banks in Europe has been for sovereigns to take on loans from eurozone funds and then use those funds to recapitalize their troubled financial firms. One drawback to the arrangement is that sovereigns take on these loans and the banks do not, at least not directly. As Spain found recently, its national debt would increase as it planned to put a foundation under the collapse of its largest banks. The banks had growing losses and serial downgrades from ratings agencies that made their ability to raise money on their own impossible. The problem with the bank rescue package is that it does nothing to solve the region’s greatest trouble. The weakest nations in the alliance cannot recover economically on their own, even if their financial burdens are partially lifted.
Eurozone leaders have crafted a solution to the problem of funding large banks within the region. In the future, banks can apply directly to a central supervisory council that will be able to recapitalize any or all without the financial participation of the nations in which each is headquartered.
Incidentally, the eurozone leaders probably have decided that countries that need money on their own can access the European Stability Mechanism without constant monitoring of their budgets by the International Monetary Fund, European Union and European Central Bank. They only need to agree in writing, and in principle, to commitments to bring down government spending. Nations like Spain will not have to buckle to a situation in which their finances are essentially run by outsiders.
The program to stabilize the finances of the region may have a third leg. A growth package of as much as 120 billion euros would be put in place to offer capital for countries that have slipped into a second recession in the past five years.
Each of these “deals” has yet to be set out in specific. Arguments over these kinds of specifics have broken down in the past, and may again. But the negotiation around the implementation of these plans is not the major threat to the effectiveness of all three of the new initiatives.
The deficits that have brought nations including Greece and Spain nearly to their financial knees hardly gets addressed by the new plans. The sum of 120 billion euros cannot be enough to lift three or four national economies out of recession, particularly because there will be battles about how the funds are applied for and implemented. The funds, even if they are applied adroitly, cannot quickly attack Spain’s 25% unemployment, nor the unwillingness of many of its people and businesses to pay taxes — a nearly universal problem among the region’s weakest economies. And none of the plans is likely to calm international capital markets, which believe that the troubles in Europe are structural and part of decades of practices that have taken most of the efficient productivity out of countries and undermined business activity and the ability to employ the lion’s share of their workers.
The eurozone leaders have agreed to plans that will address only a modest part of the widening problem of the region’s growing deficits and the inability of many countries to rebuild manufacturing and services sectors that could create growth in the long term. Until those problems are solved, at least partially, the real trouble that has caused the disaster will persist.
Douglas A. McIntyre