A necessary step, but now growth is needed

Peer Steinbruck, Angela Merkel's former Finance Minister and who will probably be her rival in the 2013 German elections, said something almost obvious in yesterday's heated parliamentary debate at the Bundestag. The approval of new powers and resources for the European Financial Stability Facility, the fund to bailout European states, is necessary but not enough to solve the sovereign debt crisis in the euro area.

The 440 billion euros currently available to the EFSF are needed to fight yesterday's battle, do damage control in Greece, Portugal and Ireland. Today's battle, where contagion has almost exploded and Italy and Spain are on the firing line, and the survival of the common currency, requires other resources. Financial and decision-making capabilities.

It is gaining time, just like the probable approval by the Troika of the next tranche of aid to Greece: 8 billion euros without which Athens is condemned to an immediate default. Time to do what? The succession of news just yesterday, other than Bundestag vote, shows that there are many outbreaks to contrast. The most difficult one is growth: September data on household and corporate confidence in Euroland were dreadful.

The economy could suffer a contraction in the third quarter and enter a recession in the following quarter. The Euro-coin indicator, developed by the Bank of Italy to measure the performance of activities in the euro area, shows that for three months now the slowdown has been more severe. Growth is the problem of all problems in Europe and also the first concern of markets, even if at first sight everyone is concentrated on the "default, no default" dilemma for Greece.

It is also the most thorny of problems, because in the short term there is little that can be done; maybe just an interest rate cut by the European Central Bank, cancelling the two hikes decided in the past months. But Germany today is challenging this move.

The other two pieces of news yesterday give a sense to the seriousness of the situation: first of all the result of the Italian government bond auction with yields that returned to levels seen before the introduction of the euro, wiping out a convergence process that we were not able to exploit in order to do the right things at the right time; and the withdrawal of the privatization of Spain's lotteries, impossible in the current market situation and a door that was closed for who depended on this measure to reduce debt. It should be noted that in Italy privatizations are brought up again today after having been repudiated when they could have been carried out.

The resources that need to be mobilized at a European level have to be enough to recapitalize the banking system so it can absorb a possible Greek default and the devaluation of the government bond portfolio, to supply enough liquidity to limit the contagion to Italy and Spain (and France) and to keep a broad reserve that assures markets of the commitment, so far just in words, to save the euro "at any cost". For all of this, the new EFSF clearly is not enough. The first increase in its resources should go through the admission that Europe cannot survive without the help of the International Monetary Fund and should urge the use of its NAB (over 500 billion dollars), maybe enriched by additional contributions from the Brics group.

Then financial leverage should be used for these funds, even if the exclusion of the ECB as a financial backer (an unacceptable condition for Germany, just like additional payments by tax-payers) will set a serious limit. At that point we could restructure, also significantly, the Greek debt and maybe also the Portuguese and Irish one. Without destroying the rest of the building.

translated by Yael Schrage

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