"I will probably be the first Polish foreign minister in history to say so, but here it is: I fear German power less than I am beginning to fear German inactivity."

Polish Foreign Minister Radoslaw Sikorski answers questions during a press conference in Prague on Nov. 4. (MICHAL CIZEK/AFP/GETTY IMAGES)

Sikorski went on to say that the break-up of the Eurozone now poses a larger threat to Poland than tanks, terrorism or missiles. A recent UBS report sheds some light on why: They estimated that the financial crises and bank runs and uncertainty around leaving the Eurozone would cost small, weak countries like Greece 50 percent of their GDP in the first year and 15 percent in the years thereafter. And big, rich countries like Germany wouldn't fare all that much better: UBS thought they'd take a hit of 20-25 percent of their GDP in year one, and 10-12.5 percent in the years after that.

Perhaps UBS is wrong. Perhaps the true costs are half that, or a quarter of that. Even so, they would be devastatingly huge. Which is why the governments of Europe want so badly to save the Eurozone. The question is whether, given political constraints and a reluctant central bank, they can.

The best way to understand the European debt crisis right now is as a race between how much European leaders feel they can do and how much needs to be done. And it really is a race. The longer Europe waits to actually solve the problem, the bigger the problem becomes, and thus the more expensive it is to solve.

Take Italy. A year ago, the Italian government -- a government run by Silvio Berlusconi, of all people -- could borrow for 10 years at 4.26 percent. Today, the Italian government is run by Mario Monti, a respect European technocrat, and the government is borrowing at 7.2 percent. At some basic level, that just doesn't make sense.

Italy's people haven't become less productive. An earthquake didn't crack the country's factories in half. There wasn't a plague. If anything, Italy has changed for the better. Its new government is thought to be more trustworthy and competent than its old one. What has changed is outside Italy: the European debt crisis has gotten worse.

As Robert Johnson, director of the Institute for New Economic Thinking, says, the European debt crisis is not zero sum. There is not a fixed amount to pay, with the only question being who foots the bill. Italy, for instance, has a lot of debt, but tough fiscal decisions made over the last decade mean it doesn't have high deficits. If economic growth is healthy, and its borrowing costs remain low, Italy should be fine. And remember, the consensus view a year or two back was that Italy would be fine.

But the confusion about the future of the Euro and the harsh austerity measures that are being imposed on the members are raising investor anxieties and cutting the outlook of growth. So now Italy's past debts are becoming a problem, as they can't finance them at their new, elevated interest rates.

And because Italy's future is now in doubt, Greece's problems are worse, as what chance does Greece have of being bailed out if Italy is now in line, also? Isn't it obvious that Germany would throw Greece overboard to keep Italy in the Eurozone? And because it looks more and more like Germany is either going to have to bail out quite a few countries or let the Eurozone fall apart -- a proposition that is far more expensive than many realize -- now their borrowing costs are rising. Even though the various government and institutions in charge of the Eurozone's finances are doing more now than they were a year ago, their inability to do enough a year ago means the problem is much worse than it was then, and so even their stepped-up effort are not nearly enough.

Top stories

1) Germany is resisting big changes, report Michael Birnbaum and Anthony Faiola: "While Europe speeds toward economic meltdown, Germany increasingly stands alone in its resistance to slamming on the brakes. Many outside Germany say that only radical solutions will keep the euro intact. But Chancellor Angela Merkel has steadfastly opposed a shift even as the crisis is in danger of spiraling out of control, potentially leading to a splintering of the currency union. Now, investors and world leaders alike hang on Merkel’s every word, searching for a hint that her resistance is simply a bluff to scare countries into behaving more like hers. Although markets seemed to take comfort Monday from reports that European leaders were considering longer-term solutions, economists warned that investors are looking for a shorter-term rescue plan to mitigate the crisis."

2) The Euro crisis is tightening credit all over, report Eric Dash and Nelson Schwartz: "Europe’s worsening sovereign debt crisis has spread beyond its banks and the spillover now threatens businesses on the Continent and around the world. From global airlines and shipping giants to small manufacturers, all kinds of companies are feeling the strain as European banks pull back on lending in an effort to hoard capital and shore up their balance sheets. The result is a credit squeeze for companies from Berlin to Beijing, edging the world economy toward another slump. The deteriorating situation in the euro zone prompted the Organization for Economic Cooperation and Development on Monday to project that the United States economy would grow at a 2 percent rate next year, down from a forecast of 3.1 percent growth in May."

3) Leaving the Eurozone would be incredibly painful for rich and poor countries alike, reports Brad Plumer: In September, economists at UBS Investment Research tried to tally up the costs of seceding from the euro. If a “weak” country like Greece tried to leave the euro, it would almost certainly have to default on its national debt, watch its domestic banking system collapse — every halfway-sentient depositor would rush to withdraw euros before they got converted to new, less-valuable drachmas — and the country would get rocked by big trade disruptions and unrest. UBS estimates that a “weak” country like Greece or Ireland leaving the euro would take a hit of up to 50 percent of its GDP in the first year alone, and then a 15 percent hit per year for the next few years. That’s a crushing blow. Now, what would happen if a financially sound country like Germany decided to leave the euro, in order to maintain its own currency? Even that would hurt. A lot...All told, UBS estimates, the cost of secession to a country like Germany would likely reach 20 percent to 25 percent of GDP, and remain at about half that for a few years thereafter.

4) Obama is stepping in on the Euro crisis, reports Annie Lowrey: " President Obama met with top European Union leaders as the euro zone sovereign debt crisis entered a perilous new phase, with increasing worries about the sustainability of the 17-country monetary union and borrowing costs climbing to new peaks. Again, he urged an immediate resolution to the debt crisis, saying the issue is 'hugely important' for the United States but stressing that the answer to Europe’s problems lies in Europe...Mr. Obama met Monday with José Manuel Barroso, president of the European Commission; Herman Van Rompuy, president of the European Council; and Catherine Ashton, the European foreign policy chief. The summit meeting came as the United States received a reminder of its own debt woes. Fitch Ratings lowered the country’s ratings outlook to negative from stable."

5) Senate Democrats are formally proposing a payroll tax cut extension, reports Seung Min Kim: "Senate Democrats are set this week to push for an expansion of the current payroll tax cut - and pay for it by tacking on an extra tax for millionaires. Senate Majority Leader Harry Reid (D-Nev.) announced Monday that the upper chamber will vote on a bill that would expand the payroll tax holiday - a move intended to pump more cash into consumers’ pockets and give a jolt to the still-weak economy. It would be paid for by a 3.25 percent surtax on income over $1 million, he said...In the House, Speaker John Boehner (R-Ohio) said last week he would be open to discussing an extension of the payroll tax cut with Obama. But the addition of the millionaires’ surtax to pay for the estimated $265 billion proposal makes it unlikelier that it would gain support from congressional Republicans."

6) Barney Frank is retiring and says Congress is broken, reports Jonathan Allen: "The House’s last great debater is ready to close. Rep. Barney Frank -- part trailblazer, part throwback -- threw the punchiest jabs on the House floor for 32 years, and his retirement leaves the House without its most recognizable character and one of its most able legislators. Frank also leaves the House with a stark conclusion about the political system: The people won’t let Congress do its work...Many lawmakers privately concede that it’s increasingly difficult to legislate in an era in which the political bases reject compromise and interest groups are ready to criticize every move they make. And while there were other factors, including the prospect of a tough reelection, that influenced Frank’s decision, it’s telling that such a prominent and successful legislator thinks he can do more to advance public policy if he leaves public office."

Top op-eds

1) Elena Kagan is hardly a stalwart lefty on the Supreme Court, writes Dahlia Lithwick: "While Kagan is assuredly a liberal, and likely also a fan of the health-reform law, a close read of her tenure at the Supreme Court suggests that she is in fact the opposite of a progressive zealot. By the end of Kagan’s first term, conservatives like former Bush solicitor general Paul Clement (who will likely argue against the health-care law this coming spring) and Chief Justice John Roberts were giving Kagan high marks as a new justice precisely because she wasn’t a frothing ideologue. The pre-confirmation caricatures of her as a self-serving careerist and party hack are not borne out by her conduct at oral argument, her writing, and her interactions with her colleagues. In fact, if her first term and a half is any indication, she may well madden as many staunch liberals as conservatives in the coming years."

2) Southern Europe is the Euro's victim, writes Austan Goolsbee: "Certainly the countries of Southern Europe must rein in excess. In the long run, however, even the deepest of cuts won't suffice. Southern Europe needs to grow or it will never control its debt levels. But with the euro zone keeping Southern Europe uncompetitive, the region's growth prospects will remain dismal. Northern Europe has fueled its growth through exports. It has run huge trade imbalances, the most extreme of which with these same Southern European countries now in peril. Productivity rose dramatically compared to the South, but the currency did not...The countries of Southern Europe must find a growth plan without the normal export-based option. Their choices range from the brutal to the merely slow-acting. Ultimately they must raise their productivity faster than Northern Europe does to reverse the fundamental currency imbalance."

3) Obama, Gingrich, and Romney agree, or agreed, on a lot, writes Ezra Klein: "Both Gingrich and Romney, for instance, supported a universal health-care plan backed by an individual mandate requiring all Americans of means to purchase health-care insurance -- just as Obama does...Gingrich...published an op-ed in 2007 arguing that Congress should 'require anyone who earns more than $50,000 a year to purchase health insurance or post a bond.'...Gingrich and Romney also supported limits on carbon emissions to combat climate change. Gingrich’s support was particularly full-throated. 'I think if you have mandatory carbon caps combined with a trading system, much like we did with sulfur, and if you have a tax-incentive program for investing in the solutions, that there’s a package there that’s very, very good. And frankly, it’s something I would strongly support,' he said in 2007."

4) The Fed should target total income, writes Ramesh Ponnuru: "Nominal GDP (NGDP) is simply the size of the economy measured in dollars, with no adjustment for inflation. In a year when the inflation rate is 2 percent and the economy grows by 2 percent in real terms, NGDP rises 4 percent. The NGDP targeters say that the Fed should aim to keep this growth rate steady...The chief advantage of targeting NGDP, rather than inflation, is that it distinguishes between shocks to supply and shocks to demand...A positive supply shock, such as an improvement in productivity, would also elicit different responses. Under an NGDP target, the rate of inflation would decrease and real growth would increase. A strict inflation target would force the Fed to loosen money and thus risk creating bubbles."

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Still to come: A judge rejected an SEC settlement with Citigroup; the Obama administration is rejecting GOP governors' health care waivers; Barney Frank is retiring and attacking Congress on the way out; the earth could warm over ten degrees by the end of the century; and a baby has a very important business call.


No, Barney Frank didn't start the housing crisis, writes Brad Plumer: "The first contention is that Frank failed to exercise diligent oversight of Fannie Mae and Freddie Mac as the housing bubble swelled. There’s something to this, though it’s worth noting that Frank was in the congressional minority for most of the period in question. The second argument is that Frank and other Democrats -- by promoting policies to boost affordable housing -- somehow caused the subprime mess and financial collapse. That argument is especially hard to square with the facts...Countries such as Belgium, Ireland, Spain, the United Kingdom, Australian, Norway and Canada all had massive run-ups in housing prices from 2000 to 2007. It’s hard to explain how Congressional rules on inner-city housing caused all of this...What’s more, only one of the top 25 subprime lenders in 2006 was subject to affordable-housing laws."

The Fed was right to bail out banks, but it should bail out the rest of us now, writes Matthew Yglesias: "We're heading into the winter of 2011, with three years of mass unemployment under our belt and no end in sight. That's not happening because the Fed was too generous with the free money for banks at the height of the crisis. It's because once the acute phase of the banking crisis ended, suddenly we returned to small thinking and small-c conservatism. But it can't be both. If in a time of crisis, the right thing to do is to get 'crazy' then there's plenty more crazy stuff the Fed could be doing to boost overall spending in the American economy. Or if the right thing to do is to stay orthodox and ignore the human consequences, then there was no reason not to stay orthodox three years ago and refuse to lend at anything other than a penalty rate."

Germany's moralizing doesn't help anybody, writes Joe Nocera: "For months, Germany has strongly supported the European Central Bank’s unwillingness to do the one thing that might have stemmed the euro crisis: buy and guarantee large amounts of distressed sovereign debt. When I asked Martin Wolf, The Financial Times columnist whose crisis coverage has been indispensible, why the E.C.B. was reluctant to act, he theorized that it 'accepts the German view that monetizing government debt is inherently immoral.' As a result, though, what should have been a small crisis centering on Greek debt has turned into a full-fledged European contagion. Can’t the Germans see, one wonders from afar, that their economy was the great beneficiary of the bubble economy that caused Greece -- and the other peripheral euro-zone countries -- to get in over their heads, because they were buying German exports?"

The Fed gave banks $13 billion that Congress didn't know about, report Bob Ivry, Bradley Keoun, and Phil Kuntz: "The Federal Reserve and the big banks fought for more than two years to keep details of the largest bailout in U.S. history a secret. Now, the rest of the world can see what it was missing. The Fed didn’t tell anyone which banks were in trouble so deep they required emergency loans of a combined $1.2 trillion on Dec. 5, 2008, their single neediest day. Bankers didn’t mention that they took tens of billions of dollars at the same time they were assuring investors their firms were healthy. And no one calculated until now that banks reaped an estimated $13 billion of income by taking advantage of the Fed’s below-market interest rates, Bloomberg Markets magazine reports in its January issue."

Congress is looking to reign in its own insider trading, reports Carl Hulse: "In the wake of the '60 Minutes' story on Nov. 13, about 90 House members of both parties have been racing to sign on to legislation limiting Congressional trading, which Representative Louise Slaughter, Democrat of New York, has been introducing since 2006 to little effect...The bill she drafted with Representative Tim Walz, Democrat of Minnesota, would prohibit lawmakers from trading on knowledge gained from their status; prevent them from sharing that information; and establish new requirements for reporting transactions of $1,000 or more within 90 days. The Dec. 6 hearing in the House was scheduled by Representative Spencer Bachus, the Alabama Republican who chairs the committee and was one of the lawmakers who came under scrutiny from '60 Minutes.'"

Adorable babies being professional interlude: Business baby is on an important call.

Health Care

The Obama administration is refusing GOP governors' health waiver requests, reports Julian Pecquet: "The Obama administration on Monday rejected two states’ requests for waivers from the healthcare reform law. The decision could rekindle the controversy over the waiver process, as the two states that were turned down, Indiana and Louisiana, have Republican governors. GOP leaders at the state level have been extremely critical of the healthcare law and the requirements that it imposes on states. The Department of Health and Human Services said Indiana and Louisiana do not need an adjustment from the health law's medical loss ratio. That provision requires insurers to spend at least 80 percent of premiums on medical care or offer rebates to their customers starting next year."

The Supreme Court's impending health care ruling complicates the effort to set up exchanges, reports Jason Millman: "For state governments, the coming Supreme Court ruling on health reform isn’t an abstract argument about the U.S. Constitution. It’s a highly practical question about whether, when and how to proceed with one of the health law’s most important and complicated pieces: setting up health insurance exchanges. Already facing political strife over implementation of health reform, some states are wondering if they should sit tight on exchange decisions until the court rules, probably in June...Two Midwestern governors have already declared their states won’t set up an exchange until the Supreme Court decides on the health law. And that idea is growing popular among powerful state legislators vigorously opposed to health reform."

Domestic Policy

Newt Gingrich is elaborating on his immigration plan, reports Ginger Gibson: "Newt Gingrich responded to the controversy over his stance on illegal immigration by going deeper. At a town hall here Monday evening hosted by tea party favorite Rep. Tim Scott, Gingrich outlined a seven-part plan and called for withholding federal funds from 'sanctuary cities,' that don’t enforce federal immigration laws. Gingrich also pitched a 'World War II selective service model' for long-term illegal immigrants that would allow them to receive support from their communities -- and remain in the country. While they wouldn’t be deported, Gingrich said they would also not receive citizenship or be allowed to vote, drawing a distinction between his proposal and amnesty."

Republicans want to end public financing of presidential elections, reports Ben Pershing: "This week, the House will vote on a bill sponsored by Rep. Gregg Harper (R-Miss.) that would abolish the Presidential Election Campaign Fund and the Presidential Primary Matching Payment Account...Created in 1976, the public funding system -- which offers money to qualified primary- and general-election candidates, raised via a voluntary checkoff on individuals’ tax returns -- has been on the ropes for at least a dozen years. George W. Bush started a trend by declining to take money during his 2000 and 2004 presidential primaries, and Obama became the first candidate not to accept funding for his general-election campaign in 2008. At the same time, the proportion of taxpayers choosing to contribute to the presidential fund has been inching steadily downward."

Diane Ravitch has been the leading intellectual for both sides of the education debate, writes Kevin Carey: "She spoke for only eight minutes, in short, punchy sentences. 'Carrots and sticks are for donkeys.' 'Education is a right, not a race.' 'Our problem is poverty, not our schools.'...There was no indication that...she had spent years in the inner circle of conservative education policy, advocating for school vouchers, firing incompetent teachers, and shutting down failing schools...Improbably, at the end of a four-decade-long career as the nation’s most prominent education historian and a vocal advocate for education reform, Ravitch has emerged as reform’s fiercest critic. Her about-face has made her more famous and influential than she has ever been. Now, pundits, scholars, philanthropists, and education leaders are all asking the same question: What happened to Diane Ravitch?"

Antique adorable animal interlude: Mickey the German Shepard charms and delights the 1930s public with his jumping skills.


World temperatures could rise by over 10 degrees by the end of the decade, reports Juliet Eilperin: "The chief economist for the International Energy Agency said Monday that current global energy consumption levels put the Earth on a trajectory to warm by 6 degrees Celsius (10.8 degrees Fahrenheit) above pre-industrial levels by 2100, an outcome he called 'a catastrophe for all of us.' Fatih Birol spoke as as delegates from nearly 200 countries convened the opening day of annual U.N. climate talks in Durban, South Africa. International climate negotiators have pledged to keep the global temperature rise to 2 degrees Celsius, or 3.6 degrees Fahrenheit, above pre-industrial levels. The Earth has already warmed 0.8 degrees Celsius, or 1.4 Fahrenheit, so far, according to climate scientists."

Fracturing isn't necessarily a coal alternative, writes Elizabeth Kolbert: "Every kind of energy extraction, of course, poses risks. Mountaintop-removal mining, as the name suggests, involves 'removing' entire mountaintops, usually with explosives, to get at a layer of coal. Coal plants, meanwhile, produce almost twice the volume of greenhouse gases as natural-gas plants per unit of energy generated. In the end, the best case to be made for fracking is that much of what is already being done is probably even worse. The trouble with this sort of argument is that, in the absence of a rational energy policy, there’s no reason to substitute shale gas for coal. We can combust them both! The way things now stand, there’s nothing to prevent us from getting wasted mountains and polluted drinking water, and a ruined climate to boot."

We need to defend the Clean Water Act, writes William Reilly: "The Environmental Protection Agency estimates that about a third of the nation’s waters are still unhealthy. About 117 million Americans -- more than a third of the population -- get some or all of their drinking water from sources now lacking protection. Given the deep antipathy to regulation on Capitol Hill -- the House actually approved a measure in July to strip the E.P.A. of some of its authority to enforce the Clean Water Act -- Congress has been unable or unwilling to clarify the law so that progress can continue in restoring and protecting these waters...The American economy has performed well over the past four decades: real per capita income has doubled since 1970 and pollution is down even with 50 percent more people. The choice between a healthy environment and a healthy economy is a false one. They stand, or fall, together."

Wonkbook is compiled and produced with help from Dylan Matthews and Michelle Williams.