WASHINGTON — The Obama administration has applauded the euro zone for moving to save its common currency and enforce fiscal discipline among its members. Yet the deal has done little to calm American concerns about an inadequate “firewall” — financing put up by European governments to ensure that all euro zone countries maintain access to the debt markets at sustainable interest rates.
Chancellor Angela Merkel of Germany “has made some progress with other European leaders in trying to move towards a fiscal compact where everybody is playing by the same rules and nobody is acting irresponsibly,” President Obama said at a news conference on Thursday. “That’s all for the good, but there’s a short-term crisis that has to be resolved to make sure that markets have confidence that Europe stands behind the euro.”
A senior administration official echoed those comments on Friday, saying that Europe is making encouraging and significant steps toward a comprehensive plan — but still needs more money and stronger mechanisms to calm markets in the short term.
At the Brussels summit meeting, the 17 European Union countries that use the euro agreed to run only small deficits in the future, allowing central oversight of their national budgets. But they did considerably less to stop investors from pushing bond yields up to punishing levels in countries like Italy and Spain.
To deal with that immediate crisis, the European Union governments agreed to two things. First, they agreed to consider offering up to 200 billion euros in bilateral loans to the International Monetary Fund, with a final decision to be made within 10 days.
Second, they agreed to put a permanent 500-billion-euro bailout fund, called the European Stability Mechanism, or E.S.M., into place a year early. Rather than supplanting the current, temporary bailout fund, the European Financial Stability Facility, in 2013, the E.S.M. will run alongside it for one year starting in July 2012.
Those measures in and of themselves will not be enough to stop investors from shutting big euro zone countries out of the international debt markets. Nor will they wrench borrowing costs down. Thus, they are unlikely to cheer the Obama administration, which has repeatedly argued that European leaders need to address the sovereign-debt crisis plaguing countries across the Continent immediately, with overwhelming force, and using their own money.
“The deal will quiet markets for a while, but the situation will remain fluid and subject to numerous shocks,” says Uri Dadush, the director of the international economics program at the Carnegie Endowment for International Peace. “The deal is too heavily reliant on adjustment in the periphery, and not enough on help from the core and the rest of the world. The main thing missing from the deal is a real ‘bazooka.’”
The agreement does move forward the creation of the permanent bailout fund, and would seem to enhance the amount of money available to keep countries’ borrowing costs stable. But the Brussels compact actually caps the two funds’ total lending capacity at 500 billion euros. That is only 60 billion euros more than the current lending capacity of the temporary bailout fund, the European Financial Stability Facility. The plan does say European leaders will reassess the cap in March, though, and watchers say they may do so sooner.
American leaders have continually called for any bailout mechanisms to have significantly more financing, enough to deal with problems in big, heavily indebted countries like Italy. Speaking in Berlin on Tuesday, for instance, Treasury Secretary Timothy F. Geithner called for a strengthened firewall to “provide the oxygen necessary for economic growth” and to keep interest rates manageable.
Nor is the I.M.F. measure seen in Washington as any sort of magic bullet for the short-term sovereign-debt crisis.
It is not clear whether the 200 billion euros will go to a special fund earmarked for Europe, or into the general I.M.F. funding pool. If it goes into the general pool, it would help with the fund’s liquidity. But it would not mean the fund would have enough money to help a big European sovereign — or two — if borrowing costs spiked. Italy alone has to roll over 360 billion euros in debt in 2012.
That said, the 200 billion euros are seen as an invitation for other countries — presumably cash-rich emerging-market nations — to add financing to the I.M.F. as well. In a statement, the European Council added the hopeful note, “We are looking forward to parallel contributions from the international community.” The I.M.F.’s managing director, Christine Lagarde, said in a statement, “I appreciate this demonstration of leadership from Europe, and I am hopeful that others will also do their part.”
A senior administration official indicated that the United States supported enhancing the I.M.F.’s liquidity, though the United States has ruled out contributing any more financing to the I.M.F. But the Obama administration argues that Europe must provide the great bulk of the financing for stabilizing its own countries’ borrowing costs.
It is a point they have made repeatedly. “Europe is wealthy enough that there’s no reason why they can’t solve this problem,” Mr. Obama said on Thursday. “It’s not as if we’re talking about some impoverished country that doesn’t have any resources. If they muster the political will, they have the capacity to settle markets down.”
The senior administration official did emphasize that the fiscal compact may make other changes to improve the situation in Europe easier, including opening the door for more action from the European Central Bank. The official also lauded a change to E.S.M. bylaws, striking a clause requiring insolvent countries to negotiate haircuts with their bondholders.
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