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The Euro’s Latest Reprieve

NEW YORK – Like an inmate on death row, the euro has received another last-minute stay of execution. It will survive a little longer. The markets are celebrating, as they have after each of the four previous “euro crisis” summits – until they come to understand that the fundamental problems have yet to be addressed.

There was good news in this summit: Europe’s leaders have finally understood that the bootstrap operation by which Europe lends money to the banks to save the sovereigns, and to the sovereigns to save the banks, will not work. Likewise, they now recognize that bailout loans that give the new lender seniority over other creditors worsen the position of private investors, who will simply demand even higher interest rates.

It is deeply troubling that it took Europe’s leaders so long to see something so obvious (and evident more than a decade and half ago in the East Asia crisis). But what is missing from the agreement is even more significant than what is there. A year ago, European leaders acknowledged that Greece could not recover without growth, and that growth could not be achieved by austerity alone. Yet little was done.

What is now proposed is recapitalization of the European Investment Bank, part of a growth package of some $150 billion. But politicians are good at repackaging, and, by some accounts, the new money is a small fraction of that amount, and even that will not get into the system immediately. In short: the remedies – far too little and too late – are based on a misdiagnosis of the problem and flawed economics.