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The coming depression blog | February 16, 2019

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Europe’s rescue plan! Will it succeed?

Leaders of the world’s major economies agreed Friday to support the European debt crisis rescue plan, but without actual cash contributions. YOU can understand the self-congratulation. After marathon talks, the leaders of the euro zone agreed on a “comprehensive package” to dispel the crisis that has been plaguing the euro zone for almost two years. Obama, at the French Riviera for a summit of the Group of 20 leading industrialized and developing economies, pledged to be a partner in helping the Europeans copes with the economic emergency. But his aides insisted that Europe’s problem, brought on by the threat of a Greek default, was one it had to fix.

European leaders have agreed to a $1.4 trillion rescue fund to stop the debt crisis in Greece from bleeding into other shaky euro-zone economies — and they are looking to China to foot part of the bill. And while the United States and Europe come to the summit grappling with problems of huge debt and anemic growth, China’s problems are the stuff of envy: what to do with a foreign reserve stockpile of $3.2 trillion and how to slow down growth to keep the its economy from overheating.

“The root of the heavy European debt is excessive welfare,” wrote one Weibo user under the name “Turbulence and Change.” “They have a large number of lazy people. Even if China doesn’t offer a hand, Europeans still won’t live worse than Chinese. Furthermore, no European will die of hunger.” The reason: G-20 leaders want to make clear that the debt crisis is of Europe’s making and should be solved first and foremost by Europe, through national treasuries or Eurozone rescue funds that are to be bolstered under a plan outlined last week.

“You know, we’re talking about Europe,” said a senior U.S. official in Cannes who would not be identified because President Obama is holding a press conference soon. “This is about the future of Europe. And the Europeans recognize more than anybody else that future is in their hands.”Europe is the largest U.S. trading partner, and its intertwined financial institutions mean that a worsening crisis in Europe inevitably would spread across the Atlantic. The timing could not be worse as the weak U.S. economy is beginning to show some signs of life even with the unemployment rate stuck at 9.1 percent.

  • The rescue plan will be seen as a failure.  The ring fence around Greece was imaginary, the bank recapitalization a farce, the write down of Greek debt insufficient, the EFSF plan a dream.
  • Yet again, disaster will loom. And yet again, the ECB will end up staving it off. Fortunately, Mario Draghi, the ECB’s incoming president, made it clear this week that he realizes that is his job. But therein lies the tragedy of this summit. An ECB pledge of unlimited backing for solvent governments would have had a far better chance of solving the crisis months ago, and remains the best option today.
  • White House aides said the upheaval in Greece showed the need to put a rescue plan in place regardless of the outcome in Athens. “The steps that need to be taken are clear, again, irrespective of the political personality or situation at any given moment,” said Ben Rhodes, a deputy national security adviser.
  • Europe’s leaders burned both time and credibility in this failed effort, just like the previous ones during the past 21 months.
  • Now Europe’s problem will be seen as regional, not just Greece.
  • As a result of these things the next rescue plan probably becomes 10x more difficult.

At this summit Europe’s leaders had hoped to prove that their resolve to back the euro was greater than the markets’ capacity to bet against it. For all the backslapping and brave words, they have once again failed. There will be more crises, and further summits. By the time they settle on a solution that works, the costs will have risen still further.


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