Europe's Faulty Approach to Its Crisis, and What Leaders Must Do

By Peter Atwater  JUN 21, 2011 9:15 AM

The problem with Europe's current approach to its crisis is that nothing is ever final. Every decision made and solution presented requires yet another decision or action.

 


At one point in my career I worked for a manager whose favorite line when approached with a problem was simply “cut to the but” – that is to say, get to part that really matters.

Reading all of the reports out of Europe over the past 72 hours, they seem to be filled with an endless list of contingencies and assumptions which have me now simply trying to “cut to the but” as I read them.

To give you a sense of what I mean, here is my but-headed reading of the headlines out of Europe over the past 72 hours:

Yes, there will be bank stress test results, but they will exclude any sovereign defaults.

Yes, Greece will get its next quarterly installment of bailout money, but only if the country’s Parliament passes “a contentious package of budget measures.”

Yes, a vote on those measures is expected at the end of the month, but Mr. Papandreou must first survive a vote of confidence today.

Yes, EU finance leaders increased the size of the EU’s current bailout fund (but it is only temporary and expires in 2012), but the increase requires national parliament ratifications.

Yes, the finance ministers dropped the preferred creditor status for the European Stability Mechanism, but that only applies to Greece, Ireland and Portugal and if those countries need more cash after 2013 (when the ESM comes into existence) the carve-out does not apply.

Yes, burden sharing “will be the rule," but the finance ministers want to avoid “selective default” for Greece by the rating agencies.

And I could go on and on and on.

For every positive, there is a potentially very negative “but." And it’s not just in the headlines since Friday. Every major announcement since the interplex crisis (see: 2008 Redux: The 2011 Crisis of the Interconnected Sovereign Complex) began in Europe is filled with “buts." For example, EFSF debt is rated Aaa, but that rating is contingent on the ongoing willingness and ability of France, Germany and The Netherlands to support the facility.

The problem with Europe’s current approach to its crisis is that nothing is ever final. Every decision made and solution presented requires yet another decision or action.

To these eyes it has become an endless game of “Mother, May I” filled with ongoing contingencies. Instead of a “lump sum” contract paid up front, everything is a “progress payment” – and most of that in the form of increased letters of credit, not outright cash.

Admittedly, some of Europe’s Rube Goldberg-esque solution is a function of the region’s prescribed decision-making process which attempts to balance national versus pan-European governance. But it’s no way to handle an intertwined and interdependent sovereign/financial debt crisis.

European leaders need to “cut to the but," and the sooner the better for all concerned.
Position in SPY, SH and JPM.

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