The EU summit did not solve the root of the crisis

2011-07-25

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The smiles in front of the cameras fail to address the roots of the crisis.

Last week’s EU summit produced what seems to be a very promising, radical package for Greece. The markets responded quite positively to the outcomes of the summit, as stock markets went up.

The euphoria and the enthusiasm will be short-lived though since the real problem was not even addressed and also the new package is yet another narrow, ad hoc solution that only succeeds in kicking the can down the road.

The outlines of the new package are well known to everyone by now. Few know however that most of the rhetoric that was included in the final paper of last week’s summit is only restricted to nice words, lacking any real substance. (Click on the following link to view a full analysis of the outcomes of the EU summit).

EU’s understanding of the current crisis is false. It insists on approaching the crisis as a mere debt crisis of certain member-states. It omits the other two dimensions of the crisis. Namely, the quasi-bankrupt banking system of the euro and the underinvestment crisis in the European periphery. Furthermore the euro as it is currently structured is the source of divergence among its constituent economies.

The crisis is not restricted to individual member-states (perhaps that was the case back in 2008-2009). It has already spread from Greece to Ireland, to Portugal and now has contaminated Italy and Spain (while Cyprus is also in trouble after the catastrophic economic consequences of the explosion at Vasiliko). It will soon affect Belgium and France if European leaders continue to play this game of not accepting reality. Of accepting that the crisis is systemic and that is the reason behind the failure to contain it.

The narrow solution that was delivered on the last EU summit, will do little to prevent contagion. European leaders were quick to say that “as far as our general approach to private sector involvement in the euro area is concerned, we would like to make it clear that Greece requires an exceptional and unique solution.” It is this kind of logic that the markets will soon start questioning. They will start thinking that the EU has ruled out any similar measures for Ireland, Portugal and whoever else. This will be the root of uncertainty and will soon fuel speculation that will force European leaders to come back and start planning another summit to deal with the new effects of the crisis.

As for the so-called “Marshall Plan” for Greece, I must say that it has nothing to do with any real investment in structural reforms. It is only a label that has been given to the re-allocation of EU structural funds that are anyway given to countries. Moreover a real and effective Marshall Plan would require a system-wide implementation as other countries will also come to the need of “exceptional and unique solutions”.

The real systemic causes of the crisis persist. EU leaders did nothing to address them in the last summit. Even though the markets reacted with enthusiasm to the outcomes of the summit, they will soon realize that the structural problems were not addressed and will start speculating again.

I am sure that by the end of September or October European officials will come to the need of arranging yet another summit. The question now is how many more summits will be required for EU leaders to accept reality and to take measures that address the problem as it really is?

When will the point of no return be reached?