Scaling the Summit

Author: Josh Adler

This article talks about the recent EU summit meeting that is taking place December 8^th and 9^th. According to the article Angela Merkel and Nicolas Sarkozy backed out of a deal which promised future restrictions on the ability of euro-zone countries to run large fiscal deficits. Sarkozy and Merkel did this to persuade the European Central Bank to buy more government bonds. The leaders of the EU also agreed to establish the European Stability Mechanism which is a fund designed to bail out ailing countries reducing the risk of countries struggling to refinance maturing debt. There was also a change that future bail-outs would not require a write-off for private sector creditors. Standard & Poor also placed every country on negative “credit watch.” The frustration in the lack of ability to form a solution in Italy has forced trade unions in private and public sector to strike. Merkel’s proposal forces countries to keep a deficit target of 3% of GDP. European banks are scrambling to find enough capital to sustain investments. The recent three-month deal consisted of the European Central Bank, ECB, giving $50.7 billion to the banks. Still after all the borrowing from the ECB, European banks are still wary of lending out to European citizens.

During these modern times where global markets can react in split seconds, slow bureaucratic systems can be detrimental to global markets. The European economy is relying on these delegates to create swift legislation that will insure that these European banks will not fail. There needs to be a process setup to fix the problem of low capitalization in European banks. I believe that the European Central Bank needs to go through the investments of every bank and assess which banks can fail. The ECB needs to take into account the systemic risk if one bank should fail. The ECB then needs to figure how it can help raise capital for the EU member countries. Then there needs to be an agreed upon plan that will serve as a criteria for all members and prospect members of the EU. The shifting in the fiscal plans is delaying the ability to solve the problem. Is moral hazard valid? Is it right to help banks and governments that have failed?

Article: http://www.economist.com/node/21541414