The most important city in the world over the next several days is Brussels. That’s where the European Union is convening to work out what everyone hopes will be a comprehensive solution to the sovereign debt crisis.
At issue are how to make the EU bailout fund – the European Financial Stability Facility or EFSF – bigger and more powerful, how to deal with Greece, which is basically insolvent, and how best to make sure banks have enough money on hand to deal with the losses they face from Greece’s inability to pay back its loans. The big players here are France and Germany and the two have very different views on what should be done to give the EU bailout fund more oomph.
France wants to turn the EFSF into a bank. As a bank, the EFSF could borrow money from the European Central Bank (ECB) and use the cash to buy up sovereign debt – rather as the TARP program did here in the U.S. Jacob Kirkegaard is an economist with the Peterson Institute in Washington. He says this would pose several big problems.
First, the only way the ECB could make a big enough loan to the EFSF would be to print more money. This raises the risk of inflation, and the ECB’s only stated function is to prevent inflation in the Eurozone. So the ECB is dead against it.
Kirkegaard says the idea of inflation also pushes the buttons of the German people; just as we remember the Great Depression here in the U.S., Germans still recall the runaway inflation of the Weimar Republic in the 1920s. That fear of inflation makes this option “politically radioactive” in Germany, Kirkegaard says.
Germany favors giving the bailout fund some less potentially destructive firepower. One proposal is to turn the EFSF into an insurance fund. This would entail using the money it already has to guarantee that holders of existing sovereign debt will get some of their money back. The EFSF might guarantee perhaps 20 percent to 30 percent of the debt, so that debt holders would get whatever the nation in question could pay plus the guaranteed amount from the EFSF.
This approach takes the European Central Bank out of the picture. But it’s not without its own problems. Kirkegaard says that the current EFSF fund probably isn’t large enough to guarantee all the toxic debt that’s floating around out there. And it could create two kinds of bonds: the guaranteed and the not-guaranteed.
Kirkegaard says Germany also is reticent about giving the EFSF too much money because it thinks that the bailouts let the debt-heavy nations off the hook. Germans feel that they implemented tough reforms over the past decade and that those reforms helped keep their economy humming. Interestingly Kirkegaard says the Germans aren’t pointing the finger at Greece: It’s Italy they’re upset about. Kirkegaard says Germany really doesn’t want to give Silvio Berlusconi’s government any money unless it instigates long-term structural reforms in government spending, worker pay, pensions and the like.
Those are just a few of the dynamics at play in Brussels. We haven’t mentioned Europe’s banks, who are lobbying hard for a bailout that would ensure they’d get their money back. Nor have we mentioned France’s growing worries about its own debt, or on-going violent protests in Greece. We think you get the picture: coming up with a comprehensive solution to the debt crisis will require all the diplomacy, intelligence and creativity that the Europeans can muster.
Also on the show today, San Francisco topped a list that ranks the most trick-or-treat friendly cities in the U.S. The Golden Gate city scored for walkability (vital if you’re staggering dressed in a suffocating mummy suit), population density (which you need if you’re to net a half-decent haul of goodies), and median home value (obviously you want lots of wealthy folks who’ll likely hand out more candy). Strangely, however, San Francisco managed to win out despite being the third most crime-ridden city on the list!
Still, the news reminded us that Halloween is just around the corner, and the promise of all those toothsome treats is giving us an anticipatory sugar rush, strengthening the Marketplace Daily Pulse today.
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