The reason markets are battering the euro zone is that its hesitant leaders have not developed the tools for countering such pressures. The U.S. response to the 2008 credit market collapse is instructive. The Federal Reserve and Treasury took a series of huge and swift steps to avert a systemic meltdown. The Fed provided an astonishing $13 trillion of support for the credit system, including special facilities for money market funds, consumer finance, commercial paper and other sectors. Treasury implemented the $700 billion Troubled Assets Relief Program, which infused equity into countless banks to stabilize them.
The euro-zone leaders have discussed implementing comparable rescue capabilities. But, as yet, they have not fully designed or structured them. Why they haven’t done this is mystifying. They’d better go on with it right now.
Europe has entered this danger zone because monetary union — covering 17 very different nations with a single currency — works only if fiscal union, banking union and economic policy union accompany it. Otherwise, differences among the member-states in competitiveness, budget deficits, national debt and banking soundness can cause severe financial imbalances. This was widely discussed when the monetary treaty was forged in 1992, but such further integration has not occurred.
How can Europe pull back from this brink? It needs to immediately install a series of emergency financial tools to prevent an implosion; and put forward a detailed, public plan to achieve full integration within six to 12 months.
The required crisis tools are three:
●First, a larger and instantly available sovereign rescue fund that could temporarily finance Spain, Italy or others if those nations lose access to financing markets. Right now, the proposed European Stability Mechanism is too small and not ready for deployment.
●Second, a central mechanism to insure all deposits in euro-zone banks. National governments should provide such insurance to their own depositors first. But backup insurance is necessary to prevent a disastrous bank run, which is a serious risk today.
●Third, a unit like TARP, capable of injecting equity into shaky banks and forcing them to recapitalize.
These are the equivalent of bridge financing to buy time for reform. Permanent stability will come only from full union across the board. And markets will support the simple currency structure only if they see a true plan for promptly achieving this. The 17 member-states must jointly put one forward.
Both the rescue tools and the full integration plan require Germany, Europe’s strongest country, to put its balance sheet squarely behind the euro zone. That is an unpopular idea in Germany today, which is why Chancellor Angela Merkel has been dragging her feet. But Germany will suffer a severe economic blow if this single-currency experiment fails. A restored German mark would soar in value, like the Swiss franc, and damage German exports and employment.
The time for Germany and all euro-zone members to get the emergency measures in place and commit to full integration is now. Global capital markets may not give them another month. The world needs these leaders to step up.