Greece May Survive, But the Bailout Won't Help It Heal

Europe's gargantuan bond and bank bailout this weekend is nothing but "morphine to stabilize the patient," according to the International Monetary Fund's Director for Europe, Mark Belka. The joint deal by the European Union and the IMF to pump up to one trillion dollars in loans and guarantees into Greece and other European countries threatened by government insolvency was far larger than expected, a case of shock and awe that has for now impressed the markets. Finally European leaders ended their months of fiddling while Athens burned and burned. By the end of trading Monday, European stocks were up a spectacular 7.39 percent.

The markets might be placated for now, but the crisis is by no means over. As Belka emphasized at a meeting of the World Economic Forum in Brussels, the bailout resolves none of Europe's very serious underlying problems. Just like the $800 billion U.S. banking bailout in 2008 had to be followed up by restructuring and recapitalizing banks and writing off debt, so Europe's problem of out-of-control government debts can only be solved with deficit cutting, economic reforms and possibly restructuring debt. The problem is that while Europe now has a mechanism to pass out bailouts to troubled member states, it still has no system in place to get bailed-out countries back on the road to fiscal and economic health. In Brussels on Monday EU officials talked vaguely about "economic governance" and "coordination" but the 27 member governments are are still deeply at odds over what that might mean. Ditto for the question of what happens if a member state getting bailouts does not comply with whatever austerity program gets imposed. Sooner or later markets are bound to notice that spreading debt all around Europe, from profligate countries to less profligate ones, is not an exit strategy from rising debt and deficits.

Not talked about much, but at the heart of all this is the festering problem of Europe's banks. Unlike the U.S. and U.K., major Eurozone countries like France and Germany have to this day refused to subject their banks to stress tests, or provide for any kind of transparency about the true health of their financial sectors. According to the IMF, a larger share of bad assets is still hidden on the books of European banks than American or British ones. (Those bad debts are a source of embarassment to Europe's politicians, as they are likely concentrated in state-owned banks.) If France and Germany were more transparent about who owns which shaky government bonds, it would be far easier to calculate and prepare for the effects of, say, a Greek government bankruptcy, which unlike a banking crisis is a fairly straightforward problem for a financial system to resolve. Instead, because Europe still refuses to go public with the lingering problems of its banks, each impending crisis brings more uncertainty and the threat of systemic failure. Because politicians and regulators refuse to shed light on their banks, this crisis will likely linger.