Europe Needs To Move Faster

Imagine that a fire from a gas-fired barbeque broke out on your condo-apartment balcony. The heat is too intense so you call the Fire Department. The fire fighters arrive, but they don't put out the fire. (We aren't sure if the balcony is stable enough to hold fire fighters so we have to formulate a durable policy for dealing with future fires in this building.) Instead they call the fire inspector.

The fire inspector arrives 20 minutes later. By this time, the fire has spread to your living room. He calls for plans to the building in order to ascertain the structural integrity of the balcony, the location of gas lines and wiring, in order to assess the situation.

An hour passes. By this time, the fire has engulfed most of your condo-apartment. The fire inspector then calls for a summit meeting of stakeholders (unit owners, residents, etc.) in order to come to a consensus on how to best contain the fire...

Does this sound like the EU? Sometimes the slow deliberative process of democracies is the best way of achieving consensus and formulate the best policy to deal with situations. During emergencies, we need someone to take control, now.

The market is waiting for the fire fighters to act, not another summit

Mohamed El-Erian of Pimco recently commented on last weekend's G20 meeting and believes that Europe doesn't have six weeks and waiting until November may be too late:

“They don’t have six weeks,” said Mohamed A. El-Erian, chief executive of Pimco, the world’s largest bond manager. He said fear had reached the very core of the 17-nation group that uses the euro currency, with the price of insurance on German debt rising substantially this week.

The light already is flashing yellow,” Mr. El-Erian said. “They can’t allow it to flash red. You have to give people a vision of what you want the euro zone to look like.”

Simon Jo! hnson, f ormer chief economist at the IMF, recently wrote that the IMF isn't big enough to rescue Europe. Of a greater concern is how s-l-o-w the process is [emphasis added]:

Complaints may be heard this weekend, but there is no one at the IMF meetings who can persuade the key European players to move faster in their decision-making. The politicians will take their own time – prodded periodically, no doubt, by the financial markets.

Do not expect a fast resolution or, therefore, a quick turnaround in the global economy.

The fire spreads

The markets may not have the patience for another series of meetings and the long involved process of stakeholder consultations and legislative ratification. Events are spiraling out of control.

The latest idea for a levered EFSF faces many roadblocks. The head of the German constitutional court has issued a blunt warning that no further fiscal powers may be surrendered to Europe without a new constitution and a popular referendum. What's more, Angela Merkel faces tremendous opposition to the concept of an enlarged EFSF. Neil Hume of FT Alphaville reports (via BarCap) that:

According to Die Welt, the FDP’s financial spokesman, Otto Solms, argued that any attempt to introduce leverage through the backdoor would lead to the withdrawal of FDP support for the EFSF, as the contingent liabilities for the German taxpayer would rise in an undue fashion.

Moreover, even the main opposition party, the SPD, which so far had signalled its broad-based support for the EFSF reform, has signalled its discontent. The SPD’s speaker on budget issues, Schneider, argued that any introduction of leverage that would not feature explicitly in the EFSF reform bill discussed and voted on this Thursday in the Lower House would be a de facto circumvention of Parliament, and that this would simply be unacceptable to the SPD.