Crisis In Europe Puts Global Economy In Danger

At this point, anyone not officially frightened by the bleak situation in Europe simply hasn't been paying attention.

Even before the latest dispiriting piece of news -- that a planned weekend summit of European leaders in Brussels has zero chance of producing a credibly large bailout fund -- there was ample reason for concern that the continent is plunging toward another recession, potentially taking the rest of the world along for the ride.

From France to Belgium to Germany, major banks that never built up adequate stocks of capital following the synchronized shocks of 2008 appear increasingly vulnerable to running out of money. Their resulting tightness with the cash they have has been depriving economies of growth. Widespread assumptions that Greece will default on its debts has ratcheted up borrowing costs for other fiscally troubled nations, not least Italy, adding to the slowdown. Lean growth is depriving national governments of the largess needed to prop up ailing lenders, especially the ones that got themselves into budget troubles in the first place by previously bailing out banks.

Across the continent, as in the United States, political leaders who are intent on pandering to know-nothings or who are under the influence of deficient economic beliefs have embraced austerity as the cure for the advancing diseases, much like prescribing a starvation diet for a patient wasting away from malnutrition.

As if all of this were not enough, another disaster is now unfolding, one that only amplifies the others: Markets are justifiably losing confidence that Europe has the structure or the political will to address the storm threatening to tear it apart.

You may be forgiven for dismissing concerns that come attached to appeals to bolster confidence, a word with a troubling track record. The Bush administration, led by Treasury Secretary Hank Paulson, frequently cited the need to shore up confidence as it justified dispensing with deliberations about taxpayer justice to swiftly pledge (almost unconditionally) hundreds of billions of dollars in rescue funds for the very financial institutions that caused the crisis of 2008.

From Ireland to Greece, European leaders have prescribed a regimen of government spending cuts in the name of restoring confidence to markets -- only to see a resulting (and entirely predictable) slowdown in economic growth, which has itself scared markets, jacking up the costs of borrowing and further tightening fiscal constraints.

Time and again, appeals to confidence have shown themselves to be the modern equivalent of throwing virgins into the mouths of angry volcanoes while hoping for the best.

But the confidence crisis emerging from Europe has become very real. The longer that problems there build without an effective fix, the clearer it becomes that Europe has a monetary union (a shared currency, the Euro) without the political union necessary to deliver aid when one of its members is in trouble.

The European Central Bank lacks the authority to issue bonds backed by the credit of countries that share the Euro as currency, depriving it of this potentially significant means of delivering relief. The continent may well be impotent in the face of the markets' legitimate calculations that some of those members are in danger of running out of the cash needed to service their soaring debts. Should that come to pass in Greece, it would be enough to stick French banks with substantial losses that would surely spread to multiple shores. Should that happen in Italy, we may look back at the financial crisis of 2008 and see it as a mere dress rehearsal for the big one that came later.

As the crisis has built in recent months, some prominent figures, including investor George Soros and British Finance Minister George Osborne, have suggested that Europe must consider collectivizing a portion of the debts of its member states by authorizing the central bank to issue bonds backed by their credit. But France and Germany have both ruled out such a step, for fear of putting their citizens on the hook for financial troubles of weaker member states.

Germany has been particularly reluctant to put its savings on the line as guarantee against troubles in other countries, owing to a deep-seated fear of inflation. Nationalist sentiments in many European countries have traditionally limited collective action, with voters repulsed by the thought of handing more power to European bureaucrats in Brussels. Speaking in 2007, Jean-Claude Juncker, the prime minister of Luxembourg, famously put it this way: "We all know what to do but we don't know how to get reelected once we have done it."

Last year, amid the rising threat of a Greek default, Europe did cobble together a roughly $600 billion emergency fund that can be tapped to bail out struggling sovereigns and lenders. But as worries spread, so does the need for a bigger fund, with near-consensus that two or three times as much now needs to be raised to instill confidence in the markets.

For months, European leaders have failed to come up with a mechanism to make that happen, floating one contrivance after another designed to leverage what is already in the till into much more. The continent-wide bickering this has fostered has effectively added to the list of things the markets ought to worry about.

"Something will happen," former British Prime Minister Gordon Brown said on Wednesday, as he sat down with Huffington Post editors and reporters in New York, premising this belief on the inarguable fact that something indeed better happen. "You're sitting here in a world economy that's in danger of stalling."

But the following day, word leaked that this weekend's previously all-important summit in Brussels is now just a hollow exercise. Nothing will happen. Another summit has been scheduled for next Wednesday -- the soonest any agreement can be forged, and don't count on it. That old phrase "all politics is local" provides no comfort here.

German officials shot down a proposal urged by France to turn the emergency bailout fund into a bank that could tap central bank coffers to expand. "The path is closed for using the ECB to ease liquidity problems," German Chancellor Angela Merkel told her conservative parliamentary caucus in Berlin, according to a Reuters report that cited people who attended the closed-door meeting. At a meeting in Brussels, German finance minister Wolfgang Schaeuble reportedly declared: "The central bank is not available for state financing."

You need not be fluent in French, German or high finance to decipher the meaning here. Europe is rife with concerns, borne out by arithmetic, that some of its members will slide into delinquency. The more the process of debating a solution goes on, the more it becomes evident that Europe is just an idea without a workable governing architecture. (California, if you will, with worse weather and better croissants.)

Three years ago, when Treasury Secretary Hank Paulson began making the argument for the first of a series of taxpayer-financed bailouts for troubled financial institutions, he asked Congress to give him as much authority as possible, arguing that if he was able to wield a big enough bazooka, the odds of him having to use it would decline. The markets would take note of the bailout chest at his disposal and lose its fear of bank failures, enabling money to keep flowing, and averting the crisis.

Paulson's reasoning made some sense, even as he abused his authority in delivering backdoor bailouts to many of his old Wall Street cronies. Europe needs the bazooka these days, but it can't even build it, let alone point it at the threat menacing its members. As long-term Italian interest rates climb -- evidence that markets want greater return for the risks of sending money to Rome -- investors are in essence looking at their would-be European protectors and seeing a room full of people hollering at one another in different languages as they flip confusedly through the assembly manual that came with their bazooka kit.

It's simply hard to absorb this exercise in confidence building without losing confidence.