The Euro area now has a systemic crisis. It is no longer possible to believe that the crisis is limited to the peripheral countries with Spanish and Italian borrowing costs staying high after having breached levels not seen since the birth of the Euro. August also saw questions being raised about the sustainability of French public finances and growth came to a dead halt. September has seen doubts being raised about the soundness of EU banks. Germany can no longer pretend that it does not face a domestic problem now that upheavals in the Euro area have, led to a collapse in German growth.
Unfortunately many sensible things such as reducing the stock of Greek debt, forcing greater and faster recapitalization of EU banks and introducing a bigger and more flexible design for the European Financial Stability Fund and the European Stabilization Mechanism from the outset were rejected by the European Commission, the European Council or the European Central Bank, sometimes all the institutions at once.
This unwillingness and inability to make sensible choices has led us down the wrong fork in the road and is directly responsible for the crisis having morphed from being a containable crisis in the periphery to one which has now infected the core and become systemic. Enormous damage has already been inflicted on large swathes of the EU economy and will cost EU tax payers dearly. Many jobs have now been destroyed, some permanently and the handling of the crisis has done lasting and irreparable damage to the European project. It is now no longer possible to say with certainty that the Euro or even the European Union itself is safe.
Europe has a banking crisis, not a wages crisis - EU Observer Op-Ed by Sony Kapoor
EUOBSERVER / COMMENT - To a hammer every problem looks like a nail. EU leaders are once again proposing familiar solutions driven more by what is possible, even convenient, than by what the problems actually are.
Given that recent rhetoric has almost exclusively been about competitiveness fiscal and sovereign debt problems, one could be forgiven for having already forgotten that this was first and foremost a financial crisis.
The fact of the matter is that our leaders have proven incapable of understanding and tackling the financial crisis. Their inability and unwillingness to tackle financial sector problems upfront have put us in a bigger mess where both the financial health of EU banks and sovereigns is suspect. Now the solutions they are proffering could make things even worse.
At an effective size of €250 billion the European Financial Stability Facility (EFSF) is rightly perceived by markets to probably be insufficiently large in order to fulfil the need to support any of the larger Member States should they need to draw on the facility. That is why there is an earnest on-going discussion about the need to expand the size of the facility.
Many Member States are reluctant to provide additional support or guarantees for the EFSF so any tool that can help increase the effective size of the support the EFSF can provide without increasing the commitments from Member States would be very welcome. The full policy maker brief can be downloaded here.