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This-Is-It EU Summit Eupdate

posted by Anna Gelpern

A few quick thoughts as the Make-or-Break, Life-or-Death, Now-or-Never EU Summit gets going.

Previews from Merkozy earlier this week got no love, and now that Mr. Draghi has shelved the Big Bazooka idea (HT Hank Paulson), I am not entirely sure what can possibly surprise on the upside. Then again, maybe the dithering is good news--if EU policy makers had really thought this was the abyss, surely they would have done something.

I would not claim summit reading as a specialty. Besides, I am exhausted from trying to unpack decisions that have had the average lifespan of a mayfly. That is why, instead of laboring through substance, this time I will be looking for glaring signs of fecklessness. So far this week I have seen two: Private Sector Involvement and Rule Obsession.

Private Sector Involvement (or PSI) hase been code for forced sovereign bond restructuring since the mid-1990s. In this crisis, Germany has insisted that private bondholders take losses in exchange for official support of their sovereign debtors. Ergo, European announcements for over a year have insisted that any sovereign support package shall be accompanied by PSI. But PSI is anathema to the European Central Bank, which for good and bad reasons has clung to the proposition that real countries pay their debts, which has led us to the ludicrous situation where Greek bondholders are asked to take 50% haircuts voluntarily. It is the sort of "voluntarily" that got Johnny Fontane a Hollywood movie part.

But guess what! This week's front page news is that PSI is off the table in future crises. Can bondholders sleep without fear of waking up next to a severed horse's head? Surely no one in their right mind would think so. Swearing or forswearing PSI, especially in the medium term, is feckless. If the official sector is short on money or political will, PSI will happen. If it long on both, there will be PSI-free bailouts. At best, one can believe officials demanding or forswearing PSI here and now (Greece). Empty talk of distant PSI (and of nonexistent "IMF procedures") just tells me that all is well in the petty squabbles department.

Rule Obsession is even more depressing. We are in the middle of a crisis whose central message has been that saying so in a treaty does not make it so on the ground (see Maastricht targets and no-bailout clauses). But listening to EU policy makers, you would think that Europe's biggest problem is squishy treaties and soft sanctions. Brittle rules of the sort exposed in this crisis are doubly harmful because they invite evasion, are quickly and publicly broken, and destroy faith in rules in general. It is worse with rules for sovereigns. Odysseus tied himself to the mast and lived to tell the tale. When sovereign try to do it, they break the mast, sink the ship, and cause a tsunami.

A policy of ramping up sanctions telegraphs worry about the underlying rules: seems like no one would follow them of their own accord. When that "no one" is sovereign, you might as well give up.

Oddly enough, throughout the crisis, Europe has had a commitment device that is better than all the treaties and constitutions combined: the Euro. Monetary union, and the financial and economic integration that followed, have already made break-up unthinkable, or at least catastrophic. It is not the sanction, but the underlying rules that are not credible. The task in Europe is to craft a viable economic compact against the background of commitment. But for some reason, the policy makers seem to prefer prefessing commitment while refusing to fess up to its implications.

If Europe unravels, it will not be because the treaties and constitutions were too weak--I can think of no legal sanction that can trump existing institutional integration. But talk of legal formalities displaces and obscures the cost of different policy options--including exit--to the public, who should be the ones making the decision.


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