The never-ending comedy that is Europe’s sovereign-debt crisis has reached its Otter moment. That’s when the world realizes the fundamental principle guiding every important government decision is this: “I think that this situation absolutely requires a really futile and stupid gesture be done on somebody’s part!”
The quote comes from the 1978 movie “Animal House.” After the dean of the fictitious college tells the Delta House boys that he’s expelling them all, the fraternity’s smooth-talking rush chairman, Eric “Otter” Stratton, delivers those famed words of inspiration to his downtrodden brethren. Bluto, the drunk with a 0.0 grade-point average played by John Belushi, says: “We’re just the guys to do it.” Mayhem ensues.
Europe is imitating art. We keep getting futile gestures from its political leaders in response to the euro area’s debt troubles. It matters little what form these take, as long as they placate the markets until the next ad-hoc plan can be floated. One day it’s “firewalls,” whatever those are. The next it’s “bazookas.” Now it’s German domination of European political and economic life. There are too many proposals flying around to keep track.
Here’s the amazing part. The gestures often work. Just like that, the debt crisis seems to be in remission, if only for a few days. Last month the annual yield on Italy’s 10-year bonds soared past 7 percent, the same tripwire that spelled doom for Greece, Ireland and Portugal. This week it fell below 6 percent. Spain’s 10-year bonds now yield less than 5.4 percent, down from 6.6 percent last week.
The roller-coaster pattern is familiar to anyone who has watched Europe’s leaders try to keep the global capital markets at bay the past two years. First, something awful happens that shatters the public’s trust, say Greece going broke, or a big European bank needing a bailout right after getting a clean bill of health from regulators. The bond markets panic.
Eventually the credit raters get around to taking notice, and maybe even downgrading a country here or there. Standard & Poor’s this week placed the European Union and 15 euro-area nations on review for possible downgrades. (France still has a AAA rating from S&P somehow, even though the U.S. doesn’t. Go figure.) Europe’s leaders blame the raters -- anyone but themselves.
All the while the same leaders, or at least the ones who have managed to avoid getting thrown out of office, promise changes to make things better, regardless of their ability to follow through. The empty words, coupled with the possible threat someday of large sovereign-debt purchases by the European Central Bank, prove enough to frighten the markets’ skeptics and buy the politicians some time. A total financial collapse is averted. Then the cycle starts anew.
There’s always another grand meeting or summit just around the bend that euro-area leaders can point to. This week’s happens to be in Brussels. They assure us: Just wait till the leaders (make that technocrats, now) meet there, and you will see -- problems will be solved, panaceas found. And they never are.
One difference lately is that the elites are getting more ambitious about the sheer amount of time they’re seeking to buy themselves per gesture. It used to be they would delay carrying out short-term fixes for a week, or maybe a month. Now they want several months.
This week German Chancellor Angela Merkel and French President Nicolas Sarkozy called for rewriting treaties so that European countries’ national budgets would be subject to greater centralized control, as well as automatic penalties in case of violations. There’s a catch, naturally.
Sarkozy said the changes wouldn’t be drafted until March, and the amendments wouldn’t be ratified by his country for at least six months. (How convenient!) There are French elections that must be held first, you see, including for Sarkozy’s own office. So whatever the French decide, under this latest plan, investors will just have to wait patiently until next summer before deciding which European countries and financial institutions they will push to the brink of disaster next.
The markets won’t wait, of course. Plus, other countries might want a say before handing over their sovereignty. Not that such details matter for these purposes. The objective here is to come up with something -- anything -- that might have even the slightest chance of looking plausible to an untrained eye. If and when the plan falls apart, as these things tend to do, the next step is simply to dream up another one that’s a bit snappier, more persuasive.
Make no mistake, though, one day the futile and stupid gestures will end. Either Europe’s governments will find a way to continue paying their debt holders on time, or they won’t. And the longer the charades go on, the more painful the reckoning will be for everyone. Nobody in this game is fooling anyone.
(Jonathan Weil is a Bloomberg View columnist. The opinions expressed are his own.)
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