Europe: No solution 'til it gets much worse

@CNNMoneyInvest June 27, 2012: 6:47 PM ET
European leaders are holding a two-day summit in Brussels to come up with a roadmap to solve Europe's debt crisis.

European leaders are holding a two-day summit in Brussels to come up with a roadmap to solve Europe's debt crisis.

Douglas J. Elliott is a fellow in economic studies at the Brookings Institution, where he specializes in analyzing the global financial system and its regulation.

This week's Euro summit will do some useful things, but it will not remotely come close to solving the crisis.

The summit will lead to some political commitments to move in the right direction, which is more useful than it sounds because it helps enable actions to be taken later on.

However, the communiqué will be very short on specifics because the leaders are not yet ready to agree on the big things.

By one count, this is the 17th summit dealing with the Euro crisis. Why do they all disappoint on a fundamental level?

The answer is fairly simple: The real solutions will require painful actions that conflict with national myths in key countries and the politicians do not believe the public is yet scared enough to accept that much pain.

Some political problems, like our own debt ceiling debate of last summer, cannot be solved until the very last moment, because the external pressure has to be so high that politicians can gain forgiveness for making painful choices.

It also becomes less attractive to do the wrong thing, because it would be clear that the politicians triggered the ensuing disaster.

The ultimate solution to the crisis will likely require the strong countries to guarantee the debts of the weak countries, a commitment national leaders cannot explain to their voters unless the alternative is the prospect of immediate disaster.

Germany has its lowest unemployment rate in years, making it a bit hard to convince the public that everything is going to pieces. The strong countries also do not trust the weak to make the necessary reforms to avoid having the guarantees from the strong nations turn into real costs when the struggling countries default.

Therefore, the ultimate solution will also require countries in the euro area to give centralized European authorities a veto power over their budgets. Voters in the weak countries are not yet frightened enough to allow their leaders to hand over this much power to Brussels or Frankfurt.

Banking needs to be regulated, and the cost of failures shared at the pan-European level, breaking the links between banks and their national governments which have created such vicious cycles of weakness.

But, leaders in the strong countries are not yet willing to write blank checks to support the potential needs of banks in struggling countries. And virtually all of the nations are reluctant to give up too much control of their banks, which play an even more critical role in Europe than they do in the U.S.

The good news is that I believe the key European leaders will accept these steps when faced with true disaster.

The bad news is that they will need to be standing on the edge of that cliff before they are able to do the right thing. To top of page

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