Tuesday, October 25, 2011

They still don’t get it

by Charles Wyplosz

October 25, 2011

EZ leaders are working on a plan to save the euro. This column updates the column posted on 22 August 2011 by evaluating the steps EZ leaders took this weekend. Things don’t look good. By rejecting any major role for the ECB, leaders have guaranteed that any package will be too little too late. After all, imagine what the US crisis package in 2008 would have looked like if the Fed had refused to use its massive firepower to stabilise markets.

The glass is now a quarter full. This Sunday, Europe’s leaders accepted two of the three steps that are necessary to bring an end to the crisis. They know what they have to do when it comes to putting Greece on a sustainable path, and when it comes to backstopping the banks. On the third necessary step – backstopping sovereign debt to avoid contagion – EZ leaders have not yet realised the magnitude of the problem – they are talking of billions when they need to be talking of trillions. Most depressing of all is the fact that they have explicitly ruled out the ECB’s full involvement.


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