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Foreign Affairs Editor

Saving Europe: With a rescue like this, I’d rather drown…

Le 29-10-2011

The chorus of kudos and “high-fives” continues here in Europe, a day after a sleepless summit in Brussels belched up yet another “rescue plan” for the embattled euro zone.

We’re being told by our leaders that this is the Real McCoy, a blueprint for fending off financial Armageddon.

We’re being told that Europe has finally “got it”.

Of course, it’s the speculators and the panicky markets that have forced Europe – at the eleventh hour – into this frog-march towards a rickety form of pseudo-federalism.

But what have Europeans really gotten in the deal?

This rescue plan may be several degrees worse than another piecemeal solution, since it’s being sold to us as the real thing. In fact, it’s a great big switch-and-bait: Europeans are being lured into believing that they’re being sold the recipe for a stronger, more solid Euro zone, when what they’re actually getting is a clattering jalopy on the verge of collapse.

The three “pillars” of the deal are risible. Take the half-off “haircut” (up from 21% before) that the banks have reluctantly accepted. We’re supposed to believe that it was a big sacrifice for them – and that taking on any bigger loss would trigger a financial tsunami across the continent as banks succumbed to the squeeze on their balance sheets.

The truth is that the banks can endure a lot more pain than they’ve let on through all their scaremongering. Let’s not forget that the WWII allies ended up forgiving ALL of Germany’s war reparations by the early 1950s.

True, part of that was down to irreconcilable differences between the US and USSR over how they should be paid. But some have argued – and I agree – that a lot of Germany’s current prosperity is a legacy of these exemptions. In other words, I think Europe’s private investors could afford to be even more forgiving – a lot more – of Greece’s debts.

The European Financial Stability Facility, meanwhile, is being beefed up to a trillion dollars or more. That’s a big number – and it looks good in banner headlines on the front pages. Even the markets have reacted positively – for now – to that 1 followed by 12 zeros.

But even a trillion is small fry when you consider that Italy’s debt alone is well over 2 trillion. And half of the rescue fund’s resources are already committed, in any case, to Greece. A trillion dollars, in this context, is like those levees around New Orleans' Ninth Ward before Hurricane Katrina: they looked solid and formidable to almost everyone except the engineers who built them and knew the truth of their inadequacy in the face of a real storm.

And what about bank recapitalisation?

They’re being asked to raise just over 100 billion euros – in total – across the continent. French banks that are most exposed to Greece will only have to raise a tenth of that sum. And they’ll only have to put aside 9 percent of their capital in reserves. That means that they will still be able to lend out 91 euros for every 9 euros they put in the piggy bank.

I won’t even get into credit default swaps – those fancy-shmancy financial instruments that allow investors to insure against losses on their bets. If that quadrillion-dollar market were to spring a leak – even a minor one – it would make the banks’ core capital look like a drop in the Seine.

Angela Merkel came closest to getting it right when she told her country’s parliamentarians that Europe is in an “existential crisis”.

“If the euro fails,” she proclaimed, “Europe fails”.

Let’s not fool ourselves. Europe will never have enough money to come up with a rescue plan to satisfy whimsical, insatiable markets. That’s a chimera.

But with leaders endowed with enough courage, and vision, it could scrape together the political capital needed to fulfil a truly common destiny and chase away its existential demons.