Europe cannot afford any more mistakes

The first mistake, as prominent European leaders have recognised, was to admit Greece into the euro after it falsified its public accounts to get in. The second error of the EU, with Germany at the helm, was not to clear up its financial books swiftly. As Greece accounts for only two percent of European GDP, that would have been relatively easy and would have kept Greece’s public debt crisis from spilling over into much of the eurozone.

The third error – also stamped Made in Germany – was insisting on forcing through fiscal adjustment in Greece without any European investment plan to bolster the country’s growth, which has brought in its train economic asphyxiation and a suspension of the country’s debt payments. What would have been merely a manageable problem, comparable to those that face small U.S. federal states, has in consequence blown up into a new economic and financial crisis that could have a global reach, as President Obama himself has admitted.

Institutional lethargy

Within just a few months, from a lack of confidence in the debts of European peripheral states we have moved on to a distrust of European banks over the high burden of state financing they have taken on, which has translated into a new credit crunch like that experienced in 2008 following the bankruptcy of Lehman Brothers. This is stifling the productive economy and is about to provoke a relapse into recession.

The crisis in the Franco-Belgian bank Dexia, which has had to be nationalised, is a first real alarm following repeated warnings from the IMF since August on the need to recapitalise European banks. The institutional lethargy of the EU institutions, which have not even been able to implement the agreements of July 21 to help Greece, has become exasperating and explains the growing distrust of the eurozone.

Finally, this weekend, German Chancellor Angela Merkel, on whom de facto responsibility for the leadership of the euro falls, has decided to step forward and has pledged to recapitalise European banks and to promote rapid and lasting solutions to the euro crisis, including institutional reforms that should be spelled out in the coming weeks. She did so after meeting with French President Nicolas Sarkozy, which confirms just how grave the situation is.

A genuine locomotive

The next big mistake that Germany can make is to limit itself to injecting capital into the European banking sector, basically in France and Germany. That is important for avoiding disaster, but it fails to solve the underlying problem of the eurozone, which is low economic growth that hampers states from generating sufficient tax revenues to reduce their public debts.

The only effective solution is that Germany, as Europe's largest economy, revive its own domestic consumption and act as a genuine locomotive for the growth of the other countries. That would help restore confidence in the eurozone as a whole, as it could raise tax revenues to pay the debts and thus solve the problems of the banking sector burdened with state debts. No solution that does not head down this path will be stable or lasting – not even the announced reform of the treaties, a slow and complicated process.

Translated from the Spanish by Anton Baer

EU summit

Italy lashes out at French-German “directory”

At their Berlin summit last weekend, Angela Merkel and Nicolas Sarkozy announced a "quick and sustainable" response to the debt crisis, prompting a recovery in stock markets and receiving the support of US president Barack Obama. But not everybody was cheerful. "A global problem cannot be solved with a bilateral axis", commented Italian foreign minister Franco Frattini, angry at the French-German "directory". "It would be better to resume the community method without wasting more precious time".

According to La Stampa, Frattini voiced a wider dissent at the "royal couple"'s decision to postpone the EU summit scheduled for October 23rd, which took everybody from Poland’s EU presidency to the European Commission by surprise. Merkel and Sarkozy however were not impressed. "Germany and France are the Eurozone's bigger economies and share a special responsibility for the future of EU and the common currency", they stated.