Wall Street Journal
October 21, 2011
No grand plan, no big bazooka, not so much as a pea-shooter. Angela Merkel and Nicolas Sarkozy were already downplaying expectations that this weekend's summit would deliver the comprehensive solution for the euro-zone crisis that was originally promised. Now the German Chancellor and French President say they won't finalize their plans until a second summit next week. Expectations should be held firmly in check.
It's hardly surprising euro-zone leaders are struggling. This weekend's summit was being built around a three-prong approach: find a lasting solution to Greece's debt problems; recapitalize euro-zone banks to withstand sovereign defaults; and maximize the firepower of the euro-zone's €440 billion ($606 billion) bailout fund, the European Financial Stability Facility. But progress on all three fronts inevitably began to unravel. The political, constitutional and economic barriers to success are enormous.
Every attempt to find a sustainable solution to Greece's debt falls down on two constraints. One is the need to avoid a "hard" default that triggers credit default swaps and potentially uncontainable contagion. The other is the need to ensure Greek banks retain access to European Central Bank liquidity facilities. That requires Greece to borrow more money to recapitalize its banks and provide them with high-quality collateral, limiting the amount of debt relief that can actually be achieved. The alternative —large scale fiscal transfers—is one the euro zone is so far unwilling to contemplate.
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