The Economist
By Paul Taylor
PARIS | Mon Jun 13, 2011 6:59am EDT
(Reuters) - "When will the euro zone debt crisis end and how will we know it?"
A reader's emailed question cuts through the daily dramas of the financial soap opera that has kept European investors glued to their screens for the last 19 months, threatening to wreak wider global turmoil.
Yet European Union policymakers are so busy building firewalls within the 17-nation single currency area and devising temporary fixes to avert immediate disaster that scant thought is being given to how the story ends.
Next week, EU leaders are likely to buy a little more time by approving a second bailout for Greece, barely a year after Athens was granted a first 110 billion euro assistance program from the EU and the International Monetary Fund.
In Harold Wilson's 1970s Britain, this approach became known pejoratively as "muddling through."
The European Union prefers to dress it up in grand phrases such as "comprehensive package" and "permanent crisis-resolution mechanism," but a solution it isn't.
Funding fatigue is growing in the north European creditor countries, especially Germany, the Netherlands, Finland and Austria, just as austerity fatigue is mounting in Greece.
Yet all the indications are that EU policymakers have as little clue about the endgame as does my questioner.
No one in Brussels, Berlin or Frankfurt even pretends to believe the new package will solve the problem of Greece's debt mountain, already at 150 percent of annual output and rising.
Since Athens is unable to return to the capital markets for the foreseeable future -- contrary to its initial rescue plan -- lending more taxpayers' money on draconian austerity conditions is seen in Europe and Washington as the least worst alternative.
"We must win time with a new package," Finance Minister Wolfgang Schaeuble told skeptics in the German parliament last week, admitting doubts about Greece's ability to repay its debt.
At German insistence, private bondholders seem likely to be arm-twisted into "voluntarily" extending their exposure to Greek government debt for up to seven years. Two-thirds of that money is likely to come from Greek banks, which are totally dependent on European official support and have no real choice.
HARDER TO RETURN
By insisting that all new sovereign bonds issued after 2013 carry a clause making investors liable to share losses in case of a default, Berlin has made it even harder for Greece to return to the capital markets from 2014.
In private conversations, the most optimistic European officials say the second bailout may keep the show on the road until mid-2012. Pessimists say it may only hold the crisis at bay until after this summer.
"We have no guarantee that the help is over in four years," said one euro zone minister, speaking on condition of anonymity. "We have no guarantee that help is over in seven years."
"For us ministers, it is less of a danger if we are creating help before a default compared with the situation where we have to help after a default," the minister said.
Despite the bailout-of-the-bailout, most economists believe Greece faces a harsh debt restructuring in the years ahead, with substantial losses for both private investors and taxpayers.
Yet, as the same euro zone minister says, no one is discussing such a default at the political level because leaders would then have to admit to having wasted voters' money.
The next danger may lurk in Greece's banks, where a steady leakage of deposits could turn to a hemorrhage if savers take fright and put their euros under the mattress or offshore.
Or it could lie on the streets, where a spontaneous youth protest movement, drawing inspiration from the Arab Spring revolts, poses a growing challenge to Prime Minister George Papandreou's ability to enforce harsher austerity measures.
APPENDICITIS?
Taken together, Greece, Portugal and Ireland account for just six percent of the euro zone's economy and only Greece threatens to implode imminently.
Thomas Mayer, chief economist at Deutsche Bank, compares the impact of the Greek crisis on the euro zone with a bout of appendicitis: the condition is acutely painful but usually harmless if surgery is swift.
However, if an inflamed appendix is not treated decisively and infection spreads, it can be deadly. For now, the EU seems determined to give the patient more pain-killers rather than take the scalpel to its swollen debt.
By 2014, when the second bailout is due to expire, euro zone governments, the International Monetary Fund and the European Central Bank will hold a majority of Greek debt in circulation.
At that point, they will face a choice between a radical writedown that will hurt their own taxpayers and shareholders, or some form of European mutualization of the debt stock and common debt issuance by the euro zone.
So far, Germany has vehemently rejected such a solution as a "transfer union" in which the fiscally virtuous would pay for the profligate.
But in a few years' time, perhaps after the next German election, it may appear the least unattractive option.
The simple answer
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