Since I last posted on Monday, the status of the December 9 agreement in Brussels has deteriorated further. I have major doubts that this agreement will significantly ease the crisis either in the short-term or the long-term.
In 2012, €1.1 trillion of Eurozone debt will come due. Of this total, €600 billion comes from Italy and Spain. Therefore, some have suggested increasing the size of the various lending facilities. Yet German Chancellor Angela Merkel has maintained that the combination of the European Stability Mechanism (ESM)—to be introduced in July—and the extant European Financial Stability Facility (EFSF) must not exceed €500 billion. This number will be too low to adequately deal with the crisis.
European leaders had also hoped that their €200 billion contribution to the IMF—which, unlike the European Central Bank, can directly lend to sovereigns—would be matched by non-Eurozone countries. However, the United States has stood firm on their refusal to get involved in Europe. Japan has also declined to lend to the IMF, stating that they do not believe that the present agreement has adequately ensured long-term viability.
Earlier, some officials had hoped that more capital for the IMF would come from the ECB, effectively sidestepping the ECB’s prohibition against directly bailing out member states. However, ECB President Mario Draghi has shied away from this idea, arguing that such action would violate the intent of the EU treaty. Without more capital from some source, the IMF will likely not have enough resources to effectively deal with the crisis—at present, they have only €300 billion to lend.
I have further doubts about the long-term viability of this pact, which requires approval from all of the 17 Eurozone countries in order to take effect.
Within the Eurozone, both Ireland and Finland seem cautious about signing on. Opposition politicians in Ireland are requesting that citizens vote on a referendum whether or not they should ratify this agreement—or stay in the Eurozone at all. And as I wrote about on Monday, Finland is concerned about new majority voting rules for changes to the ESM.
Other non-Eurozone countries have also expressed doubts. The Prime Minister of the Czech Republic, for instance, believes that the details have not been made sufficiently clear for him to ratify the treaty:
“Right now, there is not much more than a blank sheet of paper and even the name of the future treaty might still change… I think that it would be politically short-sighted to come out with strong statements that we should sign that piece of paper.”
As the problems with Europe increase, more attention instead should instead be focused on individual countries, as Martin Feldstein argues in yesterday’s Wall Street Journal. The next step for Greece is very different than the next step for Italy. Greece, ultimately, will likely have to default on its debt and leave the Euro. Italy, on the other hand, should continue its bold reform and austerity measures. These case-specific actions are likely to be far more effective than attempts at Euro-wide treaties that lack enforcement power.