At the eve of what is now being unofficially billed as the summit to save the Euro, things are not looking good at all.
To put it mildly, no one is expecting miracles from this summit. It would be enough if they can avoid this being a disaster.
The political space is now much smaller and the size of the economic problem now much bigger than at the last such comprehensive summit in March 2011. Despite this, the summit will devote far too much time on a highly ambitious political integration agenda, much of which is unachievable in the near future and devote far too little time to tackling the growing economic problems, where action is urgently needed now.
Whenever the future of the European Union was considered in the past, at least in the last couple of decades or so, a crucial fault line that always limited progress towards an 'ever closer union' was the critical differences between the French and German approaches to the European Project.
Germany favoured a stronger institutional structure with more co-ordination and a centralized decision-making structure, France a more decentralized construction where groups of national leaders were the ultimate decision-making authority and the transfer of sovereignty to the centre was rather limited. This same fault line is now once at the heart of the discussions surrounding the Eurocrisis and the ability of the two countries to bridge this will determine the shape of Europe, in particular the Eurozone!
Note: This is an English Version of my Op-Ed Riesig groß und doch zu klein that appears in the Financial Times Deutschland on the 26th of October
Last year we proposed that the EFSF offer bond guarantees not loans, eliminating the need for it to first borrow and then lend, cutting extra costs. Retaining market access, albeit with EFSF support, could provide useful feedback on reforms and help countries get back on their feet faster.
Facing headwinds on the expansion of the EFSF necessary to restore confidence, we suggested, in January 2011, that the EFSF could resort to partial guarantees to increase effective size. Rather than lend Euro 10 billion to a country facing high borrowing costs, the EFSF could cajole sceptical lenders to lower their rates by offering them credit protection – say up to a third of the borrowed amount. The same amount could support Euro 30 billion of lending. Magic?