LONDON -- It was said of one nineteenth century British politician that he never missed a chance to let slip an opportunity.
European leaders were quick to define last month's Euro summit of 2011 as the day European leaders seized the moment and faced the crisis down.
Instead it will be seen as a huge missed opportunity, the turning point at which history failed to turn. And, in my judgment, the Euro leaders will soon be back in crisis sessions.
Last month I warned that, although Chancellor Merkel and President Sarkozy had brokered a deal which kept Greece liquid, their four political 'no go areas' -- no bailout, no default, no devaluation and no more money -- represented the capitulation of economic necessity to political expediency. I argued that the wrong conclusions arose from a wrong analysis.
Over too long a period it has suited European leaders to believe that theirs is a fiscal crisis in the weaker states, and so they have analyzed their problem in just one dimension: profligacy in the periphery demanding tougher and tougher austerity.
But Europe's problems can only be truly understood in three dimensions: not just as a fiscal crisis but as a pan-European banking crisis -- which started as, and continues to be, one of massive unfunded bank liabilities -- and as a trans-continental crisis of low growth, in part the result of the euro's deflationary bias.
Together, and in lethal combination, these three problems threaten to create a tragic roll call, year after year, of millions of European citizens unnecessarily condemned to unemployment in a wasted decade.
Having started from the wrong analysis, leaders have been making exactly the same kind of mistaken judgments we have seen in the U.S., where there are four political no-go areas: no higher taxes, no entitlement cuts, no economic stimulus and no infrastructure investments. These political constraints have also trumped an agenda for growth, and yet another engine of the world economy is being shut off from anything other than an anemic recovery.
At moments of crisis, statesmen and women have to lead markets and display irresistible resolve. The best example is when, pushing uphill against the constraints of the day, Roosevelt's new deal of the 1930s turned orthodoxy on its head and pursued stimulus instead of austerity.
In April 2009 at the London G-20 summit the world had to underpin its economy by the boldest and most dramatic of measures. And, at its moment of truth last month, Europe needed to summon up the power to restructure its ailing banks, coordinate monetary and fiscal policy and radically reform the euro, removing its structural barriers to growth.
Specifically the Brussels summit needed to accept the inevitability of fiscal transfers; trigger their precautionary facility, including for Italy and Spain; and, at a minimum, expand the European stability fund, underpinning it with a backstop facility far bigger than its current size.
Yet not one of these items even reached the agenda. Action, however, that is deferred at one point of crisis will mean even more radical action is required at the next juncture. What might have satisfied markets a few weeks ago -- a Brady style bail out for Greece -- will not now be sufficient to end Europe's economic agony, as interest rate spreads and debt-servicing costs rise, and as the pan-European stresses in the banks come to the surface.
Already both the creditor and debtor countries (the former through bank stress and the latter through both bank and sovereign stress) are being sucked in.
Of course in the short term the ECB can use its secondary market purchase program while it considers how to be the long-term lender of the last resort. But it will rightly ask what fiscal guarantee is in place for it to perform this role. The funding needs of Italy, Ireland, Greece, Portugal, Spain and Belgium just to 2014 could be around four or five times as much as the current €450m backstop facility. This could require, at a minimum, credit enhancements to help restore market access at bearable levels, or cover of up to €2 trillion (approx. $2.83 trillion).
On top of this, bank restructuring may cost as much as €200 billion in new capital, and perhaps even €300 billion (approx. $425 billion). This would require an overall backstop -- partly euro member state-financed, partly IMF -- equivalent to a quarter of Eurozone GDP.
Then we will also have to create a European debt facility (perhaps for up to 60 percent of national GDPs) and, as a sequel to that, greater fiscal and monetary coordination. This will, in turn, mean fiscal transfers based on the model of -- if not yet on the scale of -- what has taken place in the U.S. But, even if all these stabilization measures are agreed, Europe's growth will remain anemic and, far from falling according to plan, deficits and unemployment may remain too high.
So there is a final inescapable economic dimension; what I call the 'global Europe' plan -- a determination that Europe stops looking inwards and start to look outwards to export markets in the eight fastest growing economies (India, China, Brazil, Russia, Indonesia, Turkey, Korea and Mexico) that will generate most of the worlds new growth. Today, only 7.5 percent of Europe's exports go to these fast rising economies, which will create 70 percent of the world's growth.
The key to achieving sustained growth is not only a repositioning of Europe from consumption-led growth to export-led growth, but radical capital product and labor market reforms to equip the euro area for global competition -- and a G20 agreement with America and Asia to coordinate a higher path for global growth.
None of this was discussed in any detail in Brussels.
Yet without that agenda for growth, even the most painful of austerity measure is unlikely to prevent the social tragedy of high unemployment. European leaders, who assumed for ten years that the stability pact was all they needed to cope with a crisis, will find that they also have to face up to unprecedented constitutional change.
One of the reasons I opposed Britain joining the euro was that the euro had no crisis prevention or crisis resolution mechanism, and no line of accountability when things went wrong.
Today, because of the unanimity required in the voting structure of the new European stabilization fund, European leaders are still seeking agreement on funding the first phase of the European stabilization fund, long after a second, bigger phase is overdue; they remain unsure who is responsible in a crisis, not least because of their ambiguous relationship with the independent European Central Bank; and few, even now, are able to contemplate the massive constitutional issues raised by fiscal integration.
But every time the big questions are avoided, and every time the outcome is a patchwork compromise, the next crisis gets ever closer and threatens even more danger. Without action along the lines I suggest, no one can assume that Europe's historic strength is enough to prevent the most punishing of future outcomes.
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