When European leaders meet in Brussels this week, they must reach a 'grand bargain' that addresses both immediate and long-term solutions to the eurozone crisis. Proposals to date, including by Merkel of Germany and Sarkozy of France, must go further.
These are dramatic times for Europe. Many warn that it has only days left to save the euro currency or face a potentially disastrous break-up over debt problems. All eyes are now on a summit set for Dec. 8 and 9.
To avert disaster, Europe’s leaders must reach a “grand bargain” that includes short- and long-term solutions that will convincingly address both immediate and systemic problems. To solve either, help is now needed from the European Central Bank and Germany – the new “indispensable nation” of Europe and its largest and most successful economy.
The short-term challenge is to halt the rising cost of borrowing money for some eurozone countries, namely Italy and Spain. The interest rates they must pay to entice investors to buy their government bonds have reached unsustainable heights and have led to a self-fulfilling crisis: As financial markets become more concerned about the ability of these countries to repay their debts, they demand ever-higher interest rates, making it harder to repay debt.
For the foreseeable future, the European Central Bank seems to be the only actor able to arrest this vicious cycle by serving – in one form or another – as a backstop for Italian and Spanish debt.
So far, though, this idea is being rejected by the central bank and by Germany, out of worry that lax monetary policy could lead to higher inflation and take reform pressure off of debtor countries.