Financial Times
March 13, 2011
No political organisation in the world is as skilled as the European Union when it comes to muddling though. Don’t knock it. For 27 member states to agree, the art of compromise is critical. Muddling through has served the EU well over the years.
The agreement reached by EU leaders in the early hours of Saturday was a politically smart muddle. Angela Merkel got exactly what she needed: a deal that limits Germany’s financial liability. The others could live with it. Some important technical details have yet to be worked out, but the deal is essentially done.
Unfortunately, you cannot muddle through a debt crisis.
There are, in essence, two ways to resolve a debt crisis: through a bail-out or through default. Or through some clever combination of the two if you know what you are doing. If you muddle through, you end up with the default option, literally.
So where will this agreement lead us? To answer the question, it is important to understand a couple of technical aspects of the financial rescue mechanisms agreed on Saturday. The current one – the European financial stability facility (EFSF) – will run out in 2013. It gives credits to countries in trouble, and may soon buy their bonds on the primary markets. These rank pari passu – on the same terms – with everybody else’s investments. That means, should the country default, everybody gets hit equally. If, say Greece, were to default today, Germany and France would have to make good on their credit guarantees to the EFSF. It would be a political disaster. German conservatives would cry “transfer union” and drag Ms Merkel to the German constitutional court. The creditor nations would therefore not allow a default until 2013.
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