The Predictable European Summit Ritual

At the upcoming summit, Europe’s northern countries will again reject southern countries’ proposed solutions to the European debt crisis, and the euro crisis will grind on, raising the very real risk of an eventual unraveling of the euro.

European summits have now acquired a boring degree of predictability, and the upcoming June 28-29 summit in Brussels will prove to be no exception. The countries of Europe’s south—which since Francois Hollande assumed the presidency now seems to include France—will implore Europe’s northern countries to support euro bonds and a European banking union as a solution to the European debt crisis.
Germany, Europe’s paymaster, along with its like-minded northern European partners, will again say no out of fear that such a course could severely damage its long-term creditworthiness. In the meantime, the euro crisis—now well into its third year—will grind on, raising the very real risk of an eventual unraveling of the euro.
The reason one must expect the ritual will continue at the next summit is that the potential cost of euro bonds and of a European banking union have become prohibitively expensive for Germany. Now that the European crisis has metastasized from the small countries of Greece, Ireland, and Portugal to larger countries such as Spain and Italy, the Germans are all too aware that guaranteeing those countries’ sovereign borrowings or underwriting their banking systems’ deposit insurance could irreparably damage Germany’s creditworthiness.

The potential cost of euro bonds and of a European banking union have become prohibitively expensive for Germany.

As an indication of how prohibitive the potential cost to Germany of euro bonds might be, all one need do is consider that the combined public finance needs of Italy and Spain over the next two years is in excess of €1 trillion, or the equivalent of around 25 percent of Germany’s GDP. Similarly, considering that the combined size of Spanish and Italian bank deposits that might need insurance is around €2 trillion, it would seem that the potential cost to Germany of agreeing to a European bank union would be prohibitively high. After all, Germany’s GDP is only around €3.5 trillion.

Read more: http://www.american.com/archive/2012/june/the-predictable-european-summit-ritual