Long-Term Fix Taking Priority in Euro Crisis

Despite its global implications, the sovereign debt crisis is taking a back seat to European leaders’ desire for a long-term road map for the curre...
Vincent RyanJune 26, 2012

U.S. companies face a prolonged “muddling through” in Europe that will keep financial markets volatile, as a real solution to the euro zone’s problems may be far off. So said several present and former European officials and global economists at The Wall Street Journal CFO Network conference in Washington, D.C., on Tuesday.

They all said they believed Greece and other troubled nations in the euro zone periphery would stay in the currency union. But political divisions and the reluctance of euro-zone leaders to stopgap banks’ balance sheets and sovereign debt means the crisis will continue to cloud the global economic outlook, they said.

Investors should not expect much to come out of meetings among euro-zone leaders later this week in Brussels, said Axel Weber, former president of Deutche Bundesbank, because Germany and others want to fix long-term issues for the euro zone before short-term ones. Between now and year-end, euro-zone leaders will be working on a blueprint for a eurowide framework on tax rates, pension ages, health care, and other fiscal issues now handled individually by member countries.

“These things need to be much more homogenized across Europe,” said Weber. “The key issue for Europe is that the long-term systemic fix needs to be in place before we can fix the short-term funding issues.”

But that point of view was by no means unanimous. “For markets to relax, the countries in trouble need to do what’s needed to get out of [the] hole,” said Olivier Blanchard, economic counselor at the International Monetary Fund. “Spain and Italy are clearly doing it; others aren’t.” The rest of the euro-zone countries must commit to helping those that can’t do it by themselves, he said.

Douglas Holtz-Eakin, president of American Action Forum, agreed. He noted that euro-zone leaders have a political desire to have a strong influence in global affairs, but “they have to get serious. . . . They have to write the check.”

On other hand, the United States and other countries affected by the euro crisis have to realize that neither Germany nor European central banks can fix things alone. “[German Chancellor] Angela Merkel is right: don’t overestimate the strength of Germany,” said Hans Hoogervorst, chairman of the International Accounting Standards Board. “Italy, Spain, and France combined are far bigger than Germany. This is not like the U.S. bailing out Mexico.”

The role of central banks in any bailout would also be limited. “The central bank is the liquidity provider of last resort,” said Weber, now chairman of UBS AG. Countries have to ensure a bank remains solvent by following up with capital, but that “is not occurring as fast as desired.”

As for the possibility of Greece leaving the union, the speakers said it was unlikely, even though banks are preparing for adverse scenarios. A depreciation of Greece’s currency would be costly, and there would be little benefit to the country’s departure. “I think they will do everything they can to stay,” said Hoogervorst.

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