EU Drops 1 Trillion to Save the Euro

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Executive Leadership
Aug 23, 2009
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BRUSSELS (AP) -- A $1 trillion rescue for the euro has halted market panic in its tracks for now -- but may not be enough to save the shared currency in the end.

After weeks of dithering, the European Union finally put serious money on the table to prevent its government debt crisis from mushrooming -- and sinking the euro, stocks and the global recovery.

But the EU still needs to find ways to keep its member governments from spending their way to bankrupty -- and disastrously handing the others the bill, as Greece did to start the crisis.

And ultimately it needs to get its sluggish economy going if it wants to end the threat to its cherished currency union.

After frantic talks lasting into the early hours of Monday, European officials agreed the 16 countries that use the euro would put up some euro440 billion in loans, with the EU adding euro60 billion and the International Monetary Fund some euro250 billion. The European Commission would raise the money in capital markets, using guarantees from member goverments, and lend it to crisis stricken countries so they can pay their bills.

Many questions were not answered, such as how the money would be dispensed and on what terms.

European stocks rose and the euro bounced back from 14-month lows around $1.25 on Friday to over $1.30 on Monday, reversing the ominous slides and sense of panic from last week. Amid concerns the crisis would freeze banks with fear and stall the European and global economies by choking off credit to business, President Barack Obama discussed the crisis by phone with German Chancellor Angela Merkel and French President Nicolas Sarkozy ahead of a eurozone finance minister's meeting.

A weaker euro and financial and economic disaster in Europe would hurt U.S. exports just as Obama is trying to promote them. The the U.S. Federal Reserve pitched in by making dollars available for the European Central Bank to loan to shaken European banks.

Analysts warned, however, that the emergency bailout fund would do nothing to reverse Europe's soaring public debt -- and could even worsen it.

"The last thing you give a drunk is another drink," said Jeremy Batstone-Carr of Charles Stanley stockbrokers. "The process of providing a bridging facility for Greece and possibly other indebted nations will add significantly to regional debt and deficit ratios without actually solving the underlying problem."

The core problem is low -- or near zero -- economic growth, high unemployment and governments unwilling to take painful steps to hike competition or get people to work more and longer.

Even the EU's president warned that the region risks irrelevance and the end of its expensive welfare programs if it can't speed up its economy which is forecast to expand by just 1 percent this year.

"With 1 percent growth we can't finance our social model any more, with 1 percent structural growth we can't play a role in the world," Herman Van Rompuy told the World Economic Forum in Brussels. "We need to double the economic growth potential that we now have."

But instead of spending heavily to stoke growth, eurozone governments are promising to curb their debt levels. Daniel Gros of the Centre for European Policy Studies warned that too much debt reduction too fast can kill economic growth by withdrawing government stimulus from the economy -- "so the patient is dead before he can get up and walk."

More loans will mean more interest payments on loans. Greece will pay some 5 percent interest on euro110 billion in short-term loans offered by the EU and the International Monetary Fund -- close to rates that Greek political leaders complain will cripple their debt reduction efforts.

Jennifer McKeown, senior European economist at Capital Economics, said that the package won't stop euro economies like Greece, Portugal and Spain from suffering "a long period of extreme economic weakness" and won't erase fears of a default or breakup of the euro project.

"We still see the euro weakening further to around $1.20 by the end of this year," she said.

Others took fright at the prospect of EU policymakers stepping away from the strict rules that underpin the euro. Marc Ostwald, a market strategist at Monument Securities, said the rewriting of the rule book "in just a couple of hours" could foreshadow "a lot more in the way of absolute risk priced into government bond yields."

Others were worried by the European Central Bank agreeing to buy government bonds -- key support for Greece and Portugal, but raising suggestions that the bank caved into political pressure.

"It will be hard not to see this as a loss of credibility and independence for the ECB," said Marco Annunziata, chief economist at UniCredit Group. Commerzbank economist Michael Schubert said it was "a transgression" that would increase the risk of "careless management of finances" by other eurozone nations who know there's a bailout if they overspend.

Dutch bank NIBC said in a research note that the only long-term solution for countries like Greece was an eventual debt restructuring -- the polite term for a technical default, with lenders unlikely to receive anywere close to the full value of their loans to the government.

Van Rompuy called on European leaders to show "political courage" and push through changes to make Europeans work harder and work for longer. "It needs some sacrifices but it is worthwhile in the longer term," he said. "We have to focus on the longer term to keep the European way of life feasible."

He called for a radical overhaul of the way that European governments handle their economies, saying that they needed to consider pooling their national powers and create a joint economic government.

"We can't have a monetary union at the end without some form of economic and political union and that is our big task for the coming weeks and the coming months," he said.

He said he will draft plans tougher rules for EU leaders to discuss in October that will go beyond current EU limits on debt and deficit. The EU executive will on Wednesday propose that it get more oversight of government spending.

Simon Tilford, an economist at the Center for European Reform think tank, warned that EU governments so far haven't come up with anything "game changing."

Europe has few other options. The U.S. and Asia won't be buying vastly more European goods -- indeed, the U.S. is planning its own massive export drive. That means if Europe wants growth, it will have to look inward, and go for far more competition for goods and services as well as cutting labor regulations limiting hiring and firing.

"What Europe needs is a growth pact because without growth, public finances aren't going to be sustainable," said Tilford.

"The bond markets are going to be forcing them to make those kind of changes."

AP Business Writer Pan Pylas in London and Associated Press writers Frank Jordans in Basel and Matt Moore in Frankfurt contributed to this story.

This is relevant if you are planning on going to Europe anytime soon. :p
The euro problem is going to wind up causing the 2nd great depression, it's going to be a mess. I just hope it stays low enough for me to go to Europe for a vacation while the euro is sub 115 to the current yen.

It's a mad house, really!