Once upon a time, the outcomes of European Union summits were, at best, of purely local interest. But the eyes of the world will be on Brussels this weekend. Europe’s policymakers need to bear that in mind as they struggle to devise a credible outcome for the latest “summit to save the euro”. The eurozone sovereign debt crisis has become the world’s problem. That makes solving it more difficult, and more urgent.
The Europeans have three items on their agenda. The first is Greece. There is wide acceptance, at last, that much of the country’s €350bn of outstanding government bonds may never be repaid. If a restructuring had been agreed a year ago, such a sweeping default could have been avoided. The second item is Europe’s banks, which are undercapitalised, overextended, and in many cases too big. One side-effect of the banking problem is that it is virtually impossible for companies to borrow US dollars from European banks.
The third is what to do with the European financial stability facility. It is baffling that policymakers still have to find a credible role beyond capital-raising for this useful but underused firefighting tool. EU governments are too enamoured of offering guarantees to the banking sector instead of cash, which the EFSF could provide. There is a danger in current markets that such guarantees are called upon, thereby turning contingent taxpayer liabilities into actual ones.