Europe Must Be Persuaded to Make a Permanent Fix

As the G20 leaders prepare to conclude their meeting today, once again good news has had a half-life in the markets of less than 24 hours. Just as news of European plans to stand behind Spanish banks rallied markets and sentiment for only a few hours, a Greek election outcome that was as good as could have been hoped did not even buoy markets for a day. There could be no clearer evidence that the current strategy of vowing that the European system will hold together, addressing each crisis as it comes in the minimally sufficient way and vowing at every juncture to build a system that is sound in the long term has run its course. Nor is the G20 likely to change anything, at least not immediately. The troubled European economies and their sympathizers will demand more emphasis on growth, lower interest rates on their official debts and more transfers. The Germans will show sympathy with the objective of reform but will insist that financial integration must coincide with political integration, noting that no one gives away a credit card without maintaining control over its use. And the rest of the world will express exasperation with Europe's failure to get its act together and demand that more be done. Officials blessed with more diplomatic ability than economic insight or courage will produce a communique that politely expresses a measure of satisfaction with steps under way, recognizes the need to do more, and looks forward to continued coordination and dialogue. The only good thing is that expectations are so low that this is not likely to disappoint the markets very much.