The financial markets are now anxiously waiting for the eurozone leaders’ next move. The leaders do appear to have finally understood that they cannot go on delaying making critical decisions. In any case, the potential to do so has been blocked by the German constitutional court which has found the law establishing the European financial stability fund constitutional, but declared that no further transfers are allowed without the Bundestag’s authorisation. The leaders also seem to have understood that it is not enough to ensure that governments can finance their debt at reasonable interest rates, they must also do something about the banking system.
I am afraid, however, that they are contemplating some inappropriate steps. The talk is about recapitalising the region’s banks, rather than guaranteeing them, when the banking system needs to be guaranteed now and recapitalised later. The national governments cannot afford to recapitalise the banks now. It would leave them with insufficient funds to deal with the sovereign debt problem.
In the longer term, however, the eurozone needs a convincing growth strategy. During the current emergency period, fiscal retrenchment and austerity are unavoidable. But the debt burden will become unsustainable without growth in the long term – and so will the European Union itself. This opens up a whole new set of difficult, but not insurmountable, problems.