October 11, 2011

IF KICKING THE CAN down the road were an Olympic event, American politicians would win a medal. They have postponed a solution to this country’s interconnected tax, entitlement and fiscal deficit problems for — how many years has it been? But the can-kicking gold goes to Europe, for its inconclusive reaction to financial and economic problems that, if anything, pose far clearer and more immediate dangers than those of the United States.

Here’s all you need to know about the continent’s temporizing to date: Europe has twice run “stress tests” to prove to the world that its banks are well capitalized despite the large amount of questionable sovereign debt on their balance sheets. But Dexia, the Franco-Belgian bank that collapsed under a mountain of Greek and other stressed-out paper last week, had passed both of those tests, easily.

Greece has enough cash to last halfway through next month; its international rescuers are still deciding whether Athens has reformed enough to deserve another infusion of money; meanwhile, the markets are fairly screaming that Europe’s banks could not survive a Greek default and about the possible repercussions in Italy and elsewhere. President Obama says the situation in Europe is “scaring” the world. Britain’s prime minister, David Cameron, warns, “Time is short.”

This week, GermanChancellor Angela Merkel and French President Nicolas Sarkozy finally responded with a joint “we get it.” Their countries “are determined to do everything necessary to ensure the recapitalisation of our banks,” they announced. An all-encompassing solution is on the way, they promise — by the end of the month.

The rest of the world, the United States very much included, has little choice but to hope that Ms. Merkel and Mr. Sarkozy actually have a plan. Their late recognition that Europe’s banks may be woefully undercapitalized is not encouraging. But better late than never. The goal now must be threefold: organizing a Greek restructuring with big “haircuts” for private creditors; establishing a vehicle for pumping public capital into the banks that must write down this debt; and shoring up Italy and Spain, if necessary with generous but temporary liquidity from the European Central Bank.

None of these would be easy under the best of circumstances. Among the circumstances that make the situation far less than optimal are the lingering differences between Paris and Berlin over how to use the still-not-completely-ratified euro zone bailout fund to aid big banks, the weakest of which seem to be French. France wants to tap the fund quickly, which would reduce its direct costs and thus help preserve its decreasingly plausible AAA credit rating. But Germany, which would have to pick up more of the tab under this scenario, is balking. The fact that the bailout fund also depends on the approval of tiny Slovakia, whose parliament voted against it Tuesday, adds an unwelcome note of absurdity to the situation.

Paris and Berlin, and all the other governments from Bratislava to Brussels, need to find common ground, and fast, lest Ms. Merkel and Mr. Sarkozy, and their colleagues, go down in history as the leaders who brought Europe, and the world, to the brink of economic disaster — and then over it.