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16 September 2011

Geithner’s arrival tells you how bad things are in the eurozone

UK officials say it's like 2008 all over again.

By Rafael Behr

The fact that Timothy Geithner is flying in for today’s meeting of European Union finance ministers has been widely reported, but the significance hasn’t been duly acknowledged.

American Treasury Secretaries don’t drop in at Ecofin meetings on their way to the shops, because they happened to be in the area, because they had nothing better to do on a Friday afternoon. This is a sign that Washington is alarmed and impatient watching EU governments fail to get to grips with a crisis that threatens to upend the global economy.

I touched on some of this in my column this week, but that was more about the domestic implications for the Tories.

The institutions that were designed to manage the single currency have failed and there is no political will — not least because there is no domestic political constituency in any eurozone country — to start redesigning the project in a way that would be financially sustainable for the long term.

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The bottom line is that financial markets will not be reassured until there is some progress (not just a statement of intent) towards a deal that puts the whole German economy up as collateral for Greek and Italian and Portuguese debt, and the rest.

Now why would the Germans sign up for that? Well, one answer is that their banking system will collapse if they don’t. But that just feels like blackmail so, not surprisingly, they resist.

I strongly recommend this piece by Wolgang Munchau in the FT (behind a paywall unfortunately). The gist is that Germany’s constitutional court has effectively ruled out any level of fiscal integration deeper than the current stabilisation mechanism, and that is failing. So the thing that would resolve the crisis — a major political project to embed the euro in new institutions — is unconstitutional in Germany.

I generally try to avoid sounding apocalyptic, because it is often too easy and lazy to paint the worst case scenario and claim it is inevitable. But things really are looking very bleak for the euro now.

The coordinated intervention by central banks yesterday to keep commercial banks liquid is another short-term fix. The revealing thing about it is that the central bankers felt they needed to act and managed it because they are less constrained by the complex and competing demands on EU heads of government. In other words, central bankers acted because elected politicians can’t.

That says a lot about the dysfunctionality of European governance in a crisis.

I spoke to a senior Treasury official recently who told me the whole situation was reminding him of the run-up to “recap weekend” — the period between markets closing on a Friday and re-opening on a Monday when Gordon Brown and Alistair Darling had to put together a plan to save the banking system from collapse in autumn 2008. Not a happy flashback.