Like the giant financial bailout announced by the United States in 2008, the sweeping rescue package announced by Europe eased fears of a market collapse but left a big question: will it work long term?
Stung by criticism that it was slow and weak, the European Union surpassed expectations in arranging a nearly $1 trillion financial commitment for its ailing members over the weekend and paved the way for the European Central Bank to begin purchases of European debt on Monday.
Markets rallied around the world in response to the concerted defense of the euro, a package that exceeded in size the United States bank bailout two years ago.
Major stock indexes in the United States rose about 4 percent on Monday, while a leading index of blue-chip stocks in the euro zone rose more than 10 percent. The premium that investors had been demanding to buy Greek bonds plunged. But by Tuesday, that rally appeared to have sputtered out, with many Asian markets down slightly.
And as details crystallized of the package’s main component — a promise by the European Union’s member states to back 440 billion euros, or $560 billion, in new loans to bail out European economies — the wisdom of solving a debt crisis by taking on more debt was challenged by some analysts.
“Lending more money to already overborrowed governments does not solve their problems,” Carl Weinberg, chief economist of High Frequency Economics in Valhalla, N.Y., said in a note. “Had we any Greek bonds in our portfolio, we would not feel rescued this morning.”
First, a bail-out was inevitable. Regardless of the philosophical debate regarding whether or not this creates a moral hazard, the reality is this: letting Greece or any of the others states involved fail leads to social unrest in a variety of countries across the European continent. This is a bad idea in good times; in shaky times it's fatal.
There are several issues at the heart of this problem.
1.) Politicians. The older I get, the more I hate all of them. Greece has been mismanaged in a variety of ways for a long time. And the reaction from the euro region has been just as problematic. It was obvious from day one that a bail-out was going to happen, yet the EU dallied, which, in the long run, led to a higher cost.
2.) I think the basic question for the EU was this: after being around for 10 years, do we really want to commit to going forward, or end the arrangement here?" Fundamentally, this is the biggest challenge the EU has faced. Part of their decision process was probably, "do we really, really want to defend the euro?" The answer was an obvious yes.
3.) Implementation: this will be tricky as the EU has to coordinate efforts of many countries. I think the phrase "herding cats" is appropriate.
4.) Holding the coalition together. At some point, I would expect at least on country to say, "no more." How the EU reacts when this happens will be very interesting to watch.
I do have to give the EU credit for the plan once they decided to get going. The size was impressive. Will it be enough? We'll see.