A disappointing step

In contrast to initial hopes, the talks in Brussels this week have not solved the problems of the European financial crisis, and can hardly be considered a step forward with regard to the July summit, which was productive in terms of defining the adequate instruments needed to deal with sovereign debt. The meeting on Wednesday, embarrassingly burdened by the inability of the Berlusconi government to offer a reasonable cutback plan to his EU partners, took a step closer in the improvement of the European Financial Stability Fund, and it settled the debate about the recapitalization of European banks — albeit in a somewhat unfortunate manner. It was too little in terms of what had been promised, and too poor for the delicate situation of the euro zone, which is under threat of collapsing from Rome.

The decision over the recapitalization of the banking sector is highly contentious, and forms part of a wretched spiral, with no apparent ways out in terms of political initiatives. The logic of the situation says that the summit has approved a haircut on Greek debt, which will affect the balance sheets of the major European banks. To prevent this impact, there will be a rise in the capitalization of the banks of up to nine percent (the figure currently stands at seven percent), which must be covered with fresh capital. But it is not easy (perhaps it is not even advisable, given its cost) to seek capital in the market; the solution of public bailouts requires an effort on behalf of the states, which will deteriorate the credibility of nations' debts. What's more, it remains to be seen if the ratings agencies accept that the write-off on Greek debt is not a default.

The recapitalization route will only be adequate if it is a selective process, which imposes new capital requirements on directly affected banks. As well as contradicting previous political messages (there will not be a second round of capital injections for banks, for example), universal recapitalization will make credit more expensive and more difficult to access, without the chance of convincing investors, given that the failure of the stress tests have invalidated the option of public transparency. The conditions imposed, of not paying bonuses nor dividends until the process is complete, are the right way to go.

An increase in the Stability Fund is, at least, an advance on the situation in July. But no one should be fooled into thinking that a trillion euros in place of 440 billion euros — even with the modifications blessed by Merkel — will solve all the problems. In quantitative terms, the issue is that attacks on national debt cannot be avoided while there is no European Treasury capable of financing its own deficits. But while Germany has the key to the European safe (it is contributing more than 200,000 euros), this declaration of heterodoxy is unthinkable.

The political agreements, which are the useful resource of European summits, have calmed the markets, but they do not stop the difficulties that are pushing the euro to the edge of disaster. The slow political step is not the quick march that the risk of a collapse in the euro zone requires. After having let the Greek crisis worsen, the chaos is now coming from Italy. The most likely outcome is that the weakness of the Berlusconi government will damage the solvency of the country ever further, until the country cannot pay its debt and there are no resources for a bailout. Wednesday's talks were a small step in relation to the extreme severity of the risk.