The bank's decision to take a more accommodating monetary posture has at last given Eurozone markets and financial institutions the liquidity they previously lacked and desperately need to stop default, or even the fear of default, from spreading. But if the ECB has bought a measure relief, the continued narrow focus of the Eurozone's governments leaves little hope that they will use the breathing space to deal with the array of fundamental problems confronting the union. On the contrary, these underlying problems seem set to linger for years to come.
Europe's leadership has hardly distinguished itself in this crisis. Indeed, it could be said that its lack of conviction and direction has needlessly deepened it. In 2010, when Greece revealed its budget and debt problems, European Union (EU) member nations could have easily disarmed the situation. Greece is a small economy, only 1.9% of the total EU gross domestic product (GDP). Its outstanding debt amounts to a mere 0.8% of the assets of the European financial system. But instead of taking concerted action, Europe's prime ministers, presidents and finance ministers dithered. Each nation, Germany in particular, maneuvered to protect its particular finances. It is little wonder, then, that investors lost confidence in the Eurozone's commitment to its members or even itself.
With confidence lost, it was inevitable that investors would search for risk elsewhere in the union. They found it, first in Ireland and Portugal, and then in Spain and Italy. Even with Ireland and Portugal looking shaky, leadership in the Eurozone could have handled matters. They are also small—respectively only 1.3% and 1.4% of total EU GDP, with comparably small relative debt burdens.
But still, as the crisis spread to them, Europe's stronger members continued to maneuver and worry most about protecting themselves. It was only a matter of time, then, before investor fears turned to the larger, less easily managed members. That happened in summer 2011, when investor concerns turned to Spain and Italy. These economies equal respectively 8.7% and 12.6% of the EU total, with debt burdens of comparable relative size. Their needs, under attack from investors, went beyond the resources of France's or Germany's finance ministries. Matters truly had reached crisis proportions.
Even then, Europe's leaders faltered. Their plans for their preferred rescue device, the European Financial Stability Facility (EFSF), remained ridiculously vague. The Fund, by Europe's own estimates, needed at least €1.0 trillion, and probably more, to meet the needs of the situation. It originally had €440 billion in it, but had already disbursed some €150 billion, leaving a need to lever up the remaining balance almost four times to reach the €1.0 trillion goal.
But the best assurance Europe's leadership could offer was a vague reference to cash-rich nations such as China and Brazil. Though these nations might buy into the fund, as a way to get a general European credit in place of more questionable Greek, Spanish or Italian credits, these countries were never likely to give the Europeans their hoped for €1.0 trillion.
Meanwhile, the maneuvering for position among Europe's member countries continued unabated. The amazing thing in all these negotiations is that throughout Germany and the other so-called strong nations of the Eurozone, they have acted as though somehow they could avoid paying. That desire was clearly evident in 2010, at the start of the crisis, when German Chancellor Angela Merkel played to the German taxpayer, who wanted to avoid spending anything for a Greek or European rescue of any kind, and asked why Germans should have to work so that Greeks can retire at 50. Touching as the complaint was, it was also beside the point. The simple fact is that Germans simply cannot avoid paying. They will either bail out the Greeks and the rest of Europe's weak periphery, or they will have to bail out their banks, which hold much of the debt of these nations. Failing either, Germany and the rest of Europe will suffer a severe recession.
If these brutal facts already leave Merkel over a barrel, the oft-used threat to expel Greece and other nations from the common currency and the EU altogether is fundamentally hollow. It could, of course, be used as a punishment, but still would not get Germany and other stronger nations out from under the obvious financial burdens. In or out of the EU or the Eurozone, Greece, Portugal, Ireland and others would still owe the money in euros and would still be unable to pay it. German and other European banks would remain vulnerable. And expulsion would take away any measure of control. Greece, Ireland or Portugal may choose to leave, but Europe gains little by throwing them out.
