Europe at the brink

THE SUMMIT of 27 European Union leaders did not lack for drama. With the future of the euro currency and the E.U. itself on the line, all but four of those present agreed to German demands for closer fiscal integration, and three of the holdouts said they would think about it. Only Britain’s Prime Minister David Cameron, fearing the impact on London’s financial sector, rejected the deal. A new Europe is at hand, in which Germany rules, France reigns and Britain loses out.

Or so it is breathlessly reported. What matters, though, is the problem the leaders failed to solve: the economic crisis that plagues their continent and threatens the world, the United States very much included.

Italy, Spain, Portugal, Ireland and Greece have piled up more debt than they can service, and investors refuse to buy additional bonds except at crippling interest rates. One or all of those countries could default — with disastrous repercussions for German, French and other banks that hold trillions of euros’ worth of existing paper. Unless a solvent entity appears on the scene with enough cash to convince investors that money lent to Europe will be paid back, the euro, and Europe itself, are at risk.

The list of potential saviors is not very long: Germany and the European Central Bank (ECB). Only the former, with its booming export economy, has enough money saved to fund a bailout; only the latter has the capacity to take distressed debt onto its balance sheet in exchange for newly printed euros.

At the summit, the vast majority of Europe, with no real alternative, agreed to adopt balanced-budget amendments like Germany’s and accept multilateral enforcement of those rules. German Chancellor Angela Merkel beamed in triumph. In the short run, though, fiscal tightening risks exacerbating the recession that Europe already faces. In the long run, it’s not clear how the treaty is to be implemented. What we have is a promise to make a promise.

The same goes for the summiteers’ announcement that they will start rounding up an extra 200 billion euros for the International Monetary Fund and expedite establishment of a permanent bailout fund, capped at an inadequate 500 billion euros and lacking a banking charter.

Meanwhile, Rome burns. Italy needs to borrow 157.4 billion euros by the end of April. Spain will need 63.4 billion and France, 177.8 billion. Only the ECB can come up with that much money that fast. It could give the debt-strapped countries of Southern Europe some breathing room by buying their bonds at a sustainable interest rate. But Germany is dead set against that, fearing that such measures would eliminate debtors’ incentives to reform or would trigger inflation.

On Nov. 30, the European Commission’s point man for the euro crisis, Olli Rehn, warned: “We are now entering the critical period of 10 days to complete and conclude the crisis response of the European Union.” As you will notice, that was 11 days ago.