IF EUROPE goes bankrupt, taking the rest of the world down with it, it won’t be for a lack of ideas about how to fix the continent’s sovereign-debt mess. The Obama administration has been especially insistent that the Europeans should launch a far bigger bailout, reflecting Treasury Secretary Timothy F. Geithner’s belief that the only way to stop a financial crisis is to overwhelm it.
At last weekend’s International Monetary Fund meetings in Washington, there was talk of allowing Greece to default on its $485 billion debt, followed by a recapitalization of European banks and a trillion-dollar-plus commitment — possibly supplied from the European Central Bank — to fund Spain and Italy, thus preventing the Greek collapse from spreading. Such a plan seems more promising than the current policy, which consists of upgrading an existing $600 billion bailout fund while requiring Greece and other troubled “peripheral” countries such as Ireland and Portugal to slash their deficits.
And yet the answer from Germany, Europe’s economic powerhouse, remains: “Not so fast.” Chancellor Angela Merkel and her finance minister, Wolfgang Schaeuble, insist that they will do anything to prevent a collapse of the euro, but that there are all sorts of obstacles — legal, as well as economic — to more radical action. “We need to take steps we can control,” Ms. Merkel said Sunday. And the next step is a vote Thursday in Germany’s parliament on the existing plan, to be followed by other votes in other national parliaments and then by approval of the next $11 billion installment of aid to Greece in early October — assuming Greece has implemented austerity measures.
Yet events have already overtaken this approach, which was tentatively agreed to on July 21. Since then, markets have written off Greece and moved on to speculating against Italy’s ability to handle its $2.3 trillion debt. That country is able to fund itself for now only because the European Central Bank (ECB) is printing money to buy its bonds. That’s a stopgap. A brutal, global recession looks unavoidable unless the powers that be in Europe — and by that we mean Germany and the ECB — demonstrate clearly and convincingly that they have a plan for restructuring insolvent countries (e.g., Greece) while shoring up salvageable ones (e.g., Italy and Spain).
We understand the Merkel government’s predicament. German taxpayers are no more eager to rescue Greece from its profligacy than U.S. taxpayers were to rescue Wall Street. With a narrow majority in parliament, Ms. Merkel cannot simply open a cash spigot without triggering a backlash that would topple her government. She has had to play hardball both to keep her coalition together and to ensure that Greece and other aid recipients are irreversibly committed to using aid wisely before they get it.
But even perfectly implemented austerity could not save Greece at this point; the country needs debt relief, reforms and a fresh shot at growth. Greece’s inefficiency, tax evasion and corruption are indeed legendary, just as the Germans complain. It is also true that German exporters benefited from Southern Europe’s lack of competitiveness under monetary union, and that the ultimate beneficiaries of the Greek bailout include the German banks who will get paid back the money they — unwisely, in hindsight — loaned to Greece.
The world economy may depend on how Ms. Merkel handles this crisis in the coming days. Bold leadership does not come naturally to postwar German politicians, operating as they do in the historical shadow of a long-ago dictator who gave bold leadership a bad name. They prefer words such as “solidarity” and “responsibility,” which, fortunately, also describe what is required from Germany in the current situation. So let Berlin think of the task before it in those terms — and get on with it.