Piecemeal Approach to Euro Debt Crisis Has Failed

There are the obvious reasons for Europe’s piecemeal approach to its ongoing debt crisis -- namely, politics and a lack of cold, hard cash to stanch the bleeding.

And there are more complex reasons why the crisis has dragged on for months, reasons that can be summed up as follows: an inability by European leaders to see the problem for what it is.

Either way, the dithering by the leaders of the so-called European “troika” -- the European Commission, the International Monetary Fund, and the European Central Bank -- has allowed what was once a potentially manageable problem confined to a handful of the region’s weaker economies to metastasize into a crisis that now threatens the stability of the entire euro zone.

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The pattern, established over a period of nearly two years, has been all-too-clear to critics of the European containment strategy: myopic attention is focused on an isolated country in an effort to address fears that country won’t be able to its debts. Should default occur, the argument held, the domino-affect could cripple Europe’s banking system.

Eventually, after much debate and hand-wringing, a bailout is crafted. Think Greece’s first 110 billion euro bailout in May 2010, Ireland’s 85 billion euro bailout last November, and Portugal’s 78 billion euro bailout in May.

In each instance, European leaders threw all of their time and resources at the single issue at hand, essentially losing sight of the forest for the trees.

The potentially catastrophic consequences of Europe’s piecemeal strategy have never been more in evidence than in recent weeks as the entire process played out again in Greece, culminating in a second bailout effort late last month aimed at staving off a default by the Greek government.

All the while Italy, whose economy when compared to Greece’s is far more vigorous and important to the euro zone (17% of the zone’s GDP compared with Greece’s 2.5%), was seemingly ignored. And once the focus finally shifted to Italy, red flags started to emerge in Spain. Now there are growing fears that the contagion is spreading to the larger, core economies of France and Austria.

“Because (Europe’s approach) has been so piecemeal nothing was done to address the problems in countries that hadn’t yet crossed into the land of weakness. Since 2010 the IMF and everyone has been all over Greece and Portugal and Ireland, to a lesser extent, but Italy and Spain were largely left alone. Now it’s getting too late for them,” said Peter Tchir, founder of TF Market Advisors in Connecticut.   A central problem is that European leaders, in particular in the dealings with Greece, have been either unwilling or unable to diagnose the problem as one of insolvency rather than a lack of liquidity.

Theoretically, bailouts can address a lack of liquidity. It worked in the U.S. in late 2008 at the peak of the recent financial crisis when the U.S. government approved a $700 billion bailout -- the Troubled Asset Relief Program -- that kept afloat many of America’s biggest banks. The banks weren’t broke, they just couldn’t get the credit they needed to maintain their daily operations.

But bailouts don’t help insolvency, they just postpone the inevitable. To make an analogy, bailouts serve as lubricant for a slow-running engine but they do nothing for an engine that’s already seized. Many analysts believe Greece’s engine has already seized.

Greece’s first 110 billion euro bailout barely made a dent in that country’s 350 billion euro debt, and the harsh austerity measures tied to the package, while undoubtedly necessary, inflamed Greek citizens and retarded much needed economic growth. The second rescue package approved late last month only served to throw the country into political turmoil.

Tchir and others believe European leaders should have let Greece default months ago, when European banks that hold Greek debt were more stable and capable of absorbing the losses.

“I think a default in Greece would have caused an initial panic, but it would have lit a fire in Italy and Spain and we would be much better off,” he said.

Instead, precious weeks were spent wrangling over the details of another Greek bailout.

Europe’s one-crisis-at-a-time approach, rather than quelling fears of contagion, has instead raised them. Financial markets have responded in kind, pushing borrowing costs across the continent sharply higher as investors have dumped sovereign debt from any country with exposure to the crisis. Spain’s borrowing costs are currently the highest they’ve been in nearly 15 years, and France, Europe’s second largest economy, has also seen its borrowing costs skyrocket.

And that, in a nutshell, is what Europe has been trying to prevent all this time. If countries can’t afford to borrow more money to pay down or refinance their debt, Europe’s economy will seize up, much like what almost happened to the global economy in late 2008.

“Nothing spreads like fear,” said Holger Schmieding, chief economist at Germany’s Berenberg Bank, in a note published by Bloomberg News. “If the European Central Bank does not intervene forcefully to stop the rot, the panic could spread even further and eventually put the very existence of the euro and the ECB at risk.”

The economist’s warning seems an indictment of European politicians who have advocated and implemented the piecemeal approach. Which brings us back to the obvious reasons the crisis has festered for so long.

Politicians are inherently concerned with their own survival. Consequently they tend to favor short-term solutions that coincide with their short-term agendas of being re-elected.

Europe’s leaders settled on a series of quick-fix solutions in the hope that Europe’s economy would grow organically, increasing revenues across the continent and enabling debt-burdened countries to pay down their obligations.

But that didn’t happen. Growth has stalled, largely as a result of fallout from the debt problems, and Europe is once again teetering on the brink of recession. As a result, there simply isn’t enough money anywhere in Europe to mount the kind of bailout needed now that the brush fires have exploded into a full-blown conflagration.