Why won’t Europeans just do it?

by Phil Levy

Foreign Policy
October 25, 2011

This week, global economy mavens are waiting once again for European leaders to emerge with a panacea. Tradition dictates that financial panaceas should be presented on Sunday evenings, before Asian markets open. The Europeans actually scheduled their panacea accordingly, but whiffed. The cure-all was rescheduled for Wednesday.

There has been much gnashing of teeth and rolling of eyes over eurozone leaders' repeated inability to solve their financial crisis once and for all. U.S. Treasury Secretary Tim Geithner traveled to Poland last month and told a gathering of European finance ministers to Just Do It. Oddly enough, the gathered Europeans did not really appreciate the admonishment.

So President Obama joined in and added further encouragement: "In Europe, we haven't seen them deal with their banking system and their financial system as effectively as they needed to." Quoth the coverage: "Obama didn't specify what steps should be taken."

And therein lies the problem. There has been a presumption that if only German Chancellor Merkel and French President Sarkozy could stop bickering and summon the political resolve, they could take the decisive set of actions to put everything right. The rest of the world can best help, the reasoning goes, by shouting exhortations at Europe to just try harder.

But what, exactly, are Europeans being urged to do? The grand fix must address a knot of interconnected problems. First, there is the issue of Greek debt; it's huge and the Greeks can't pay it. That leads to worries about what will happen with other larger highly indebted countries around Europe's periphery; such worries mean that lenders demand higher interest rates and worry turns to panic. This sovereign debt crisis, in turn, stirs fear in those who hold all that debt; since many of the debt holders are European banks, that stirs fear in pretty much everyone -- or it should.

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