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A flawed union breeds an intractable problem

A chart displays share prices at the Greek Stock Exchange in Athens.

Thanassis Stavrakis/AP

The European debt crisis has morphed in recent days from deeply unsettling to downright frightening, roiling world markets and triggering waves of panic as politicians dither over the conditions of the latest Greek lifeline.

When euro zone finance ministers emerged from yet another crisis meeting Tuesday to announce yet another delay in giving Greece the cash it needs to stave off collapse, it heightened worries that they lack the political will to come up with a credible plan to stop the bleeding, contain the contagion and keep their monetary union from coming unglued. The fear now is that the lack of a European consensus will lead to a messy Greek default. And the fallout from that singular event would rain down on an already fragile financial system, trigger an even deeper bond revolt against Italy and other debt-ridden euro-zone countries and – worst of all – unleash another worldwide credit freeze of the type that sank the global economy in 2008-09.

Luxembourg Prime Minister Jean-Claude Juncker, who heads the 17-country finance ministers' group, said after the meeting that ministers were looking at "technical revisions" to the involvement of private-sector creditors in the latest rescue package. In other words, the creditors, mainly banks, might have to take bigger haircuts than they accepted back in July, because Greece's financial condition is deteriorating so rapidly. Still, true to form, Mr. Juncker insisted that "everything will be done" to prevent a Greek default and that it will remain a member in good standing in the euro zone.

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He also applauded Athens' "bold measures" to meet its fiscal target, even though it fell well short of the mark. Nevertheless, payment of the next €8-billion ($11-billion ) bailout payment will be put off until mid-November so officials can revisit the July deal and see if they can squeeze better terms out of the creditors.

None of this comes as a surprise to euro-skeptics, who have long warned that the single monetary union was never equipped to deal with a full-blown fiscal crisis.

"You've got a very unwieldy process, which underscores the fundamental flaw in the organization of this currency zone," said economist Stephen Roach, a fellow at Yale University. The region has a single currency and central bank, "but a fragmented fiscal leg to the stool. Fiscal fragmentation is not a sustainable piece of the currency union puzzle for Europe."

Until Europe bites the bullet and institutes "some type of consolidated fiscal and governance procedures, this problem is just not going to go away."

Even staunch believers acknowledge the system cannot survive without key structural reforms. But they argue that the internal squabbling and delays stem from the fact no one knows what's lurking down a particular policy route.

"This is uncharted territory," said Nicolas Véron, a senior fellow at Bruegel, a think tank in Brussels. "On the face of it, Greece is bankrupt and should default. But Greece is part of a monetary union, which makes everything more complicated. I'm not advocating a permanent bailout of Greece. I'm just saying this is not an easy equation to resolve."

The deeper problem is a lack of a policy framework that lawmakers could use to guide their deliberations. "You cannot ask the politicians what will happen if Greece defaults," Mr. Véron said. "Even the experts cannot answer."

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Because the benefits far outweigh the disadvantages, the members of the union will do whatever they can to hold it together, as Mr. Juncker reaffirmed.

But until they agree to some sort of co-ordinated fiscal policy governing all of them, the crisis will not be resolved, Mr. Roach said. "The fiscal fix is really the only hope for the survival of the EMU [European Monetary Union] Right now, it seems very intractable. But right now, it's Europe's only hope."

Yet too many European leaders are still shying away from the politically perilous measures needed to safeguard not merely the single currency, but the European Union itself. No government is going to be eager to cede fiscal authority or bank regulation and supervision to Brussels. But if they do not move in that direction, they will have done what an aide to U.S. President Barack Obama once said of crises. They are a terrible thing to waste.

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About the Author
Senior Economics Writer and Global Markets Columnist

Brian Milner is a senior economics writer and global markets columnist. In a long career at The Globe and Mail, he has covered diverse business beats, including international trade, the automotive industry, media, debt markets, banking and the business side of sports. More

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