Emilio Morenatti /Associated Press
Emilio Morenatti /Associated Press
BRUSSELS – European leaders are reaching for bold solutions to end a 2-year-old debt crisis that’s spread economic misery across Europe, raised doubts about the future of the euro currency, rattled investors and threatened global growth.
Investors have driven up interest rates on Spanish and Italian debt to unsustainable levels, raising the risk those big countries will need a bailout the rest of Europe can’t afford. Unemployment in the 17 countries that use the euro is 11 percent, the highest since the euro was adopted in 1999.
A $125 billion plan to bail out Spanish banks has failed to calm financial markets. Even an election that brought a pro-euro-alliance Greek government to power failed to reassure investors that Greece would continue to pay its bills, keep using the euro and avoid a financial crackup that could set off a worldwide panic.
As they meet Thursday and Friday in Brussels, leaders of the 27 countries in the European Union will consider plans to:
Tackle Europe’s government debt problems.
Fix Europe’s teetering banks.
Help debt-trapped Greece.
Stimulate Europe’s sclerotic, sluggish economy.
Still, any proposals that might be approved at the summit may not be bold or fast enough to turn back the threats closing in on Europe. And Germany, wary of being stuck with the bill for a rescue plan, might veto the ideas first.
“We’re seeing faster movement on the policy front,” says Barry Eichengreen, an economist at the University of California, Berkeley. “The problem is, the crisis doesn’t wait.”
Here’s a look at the more ambitious ideas policymakers are considering:
The worldwide financial crisis and the recession that came after ripped a hole in the budgets of many European governments, leaving them with huge debts. Greece’s government debt now equals 165 percent of annual output; in Italy, it’s 120 percent; in Ireland, 108 percent.
Economists say anything above 90 percent saps an economy’s health. Bond investors, worried about the debt, are demanding higher interest rates. The result is that many countries’ borrowing costs have reached unsustainable levels. Ireland, Portugal and Greece already have needed bailouts to pay their bills. Spain is receiving a loan to save its banks. And Cyprus this week became the fifth European country to request a bailout.
Bailout money could run short if big countries such as Italy need rescues, too. European leaders are expected to consider several ideas:
Spreading some of the weak countries’ debt loads to stronger countries that also use the euro. Alexander Hamilton, America’s first Treasury secretary, did something similar in the 1790s. He had the U.S. government absorb the debts the 13 original states ran up fighting the American Revolution.
The 17 countries that use the euro could issue jointly guaranteed “eurobonds,” sharing responsibility for the weakest countries’ debts. Or excessive government debts – anything beyond 60 percent of a country’s output – could go into a “European debt redemption fund,” guaranteed collectively and paid down over 20 to 25 years. Because the redemption fund would be a one-time move, it might be more palatable to Germany, which will be forced to pay other country’s debts, than a long-term eurobond plan.
Handing power to a centralized eurozone budget authority to demand changes in individual countries’ taxing and spending plans if they break budget rules. This idea goes beyond earlier calls for budget limits on eurozone countries. It was proposed on the eve of the summit by key European leaders.
Tapping the $625 billion available from the eurozone’s two bailout funds to buy government bonds on the open market. These purchases would drive the prices of the bonds up and the interest rates, or yields, on them down. That would help countries like Italy and Spain when they have to sell bonds to finance their deficits or replace maturing bonds.
Europe doesn’t just have a government debt crisis. It has a banking crisis, too. A collapse in housing prices buried Spanish and Irish banks in bad real estate loans. To rescue its banks, Ireland’s government needed a $106 billion bailout. Now, Spain needs a $125 billion loan from the rest of the eurozone to rebuild its banks’ capital – their defense against losses. What’s more, European banks have absorbed losses on their holdings of their governments’ debts.
Finally, Europe faces the risk of banks runs: Greek depositors are withdrawing money from banks because they fear Greece will stop using the euro. If that happened, their savings would be devastated as their deposits were shifted from euros into Greek currency worth perhaps half as much. Bank runs could spread if depositors elsewhere worried that their countries might also abandon the euro.
So the EU is considering a banking overhaul. Among the ideas:
The European Commission, which writes laws and regulations for the EU, has proposed a deposit insurance fund to protect savers across the EU the way the Federal Deposit Insurance Corp. guarantees up to $250,000 per account in the United States. Individual European countries now insure bank deposits within their borders. But bank failures could overwhelm those national funds.
The European Commission has suggested establishing a Europe-wide banking union, policed by a centralized regulator. Europe now lacks a single regulator with authority to force weak banks to build more capital or to break them apart. National regulators have been reluctant to shut down weak banks.
“No national government wants to lose control over their banks,” says Jacob Kirkegaard, research fellow at the Peterson Institute for International Economics. “But that is, of course, precisely what is required if you want to have a European banking union.”
The Spanish bank bailout has raised fears that Spain’s government couldn’t afford to repay its $125 billion eurozone loan. Some analysts say the solution is to rethink the bailout: Instead of lending money to Spain, pump it directly into Spanish banks and take an ownership stake in them. That’s how the U.S. Treasury fixed the U.S. banking system after Lehman Brothers collapsed in 2008. Congress approved the $700 billion Troubled Asset Relief Program, or TARP, and the money was used to strengthen bank capital. Most of the money has been repaid with interest, and the cost to U.S. taxpayers has been minimal.
Alessandra Tarantino/Associated Press