F or all of its troubles and mediocre growth prospects, Europe is still remarkably rich by world standards.
According to the McKinsey Global Institute, it still accounts for 30% of the $212 trillion global financial market, whereas emerging markets only account for 18%. Even taking into account a negative net foreign asset position (of the order of $2.5 trillion), there is considerable wealth in the EU.
It may therefore seem strange to wonder whether it can rescue itself without a helping hand from China and other emerging countries.
The reason is that Europe is bound by an extraordinary series of constraints.
First, the EU and the euro area do not have the power to raise taxes. This basic fact can easily be forgotten, but it is a defining feature of European integration. Unlike the US federal government, which has tax resources of its own and does not depend on contributions from states, the EU budget is almost entirely financed out of contributions. So the EU cannot raise taxes and it cannot borrow against the promise of future taxes.
Second, the euro-area member states have not really pooled their resources. The European Financial Stability Facility (EFSF) relies on guarantees provided by individual member states up to a pre-determined limit. Should one or several members withdraw because they are themselves in need, they can be substituted by the others only to the extent that this limit is not reached. So the EFSF has limited firepower (E440 billion), and it is backed by limited guarantees (totalling E780 billion). The situation would be markedly different with a joint-guarantee regime – known as Eurobonds – but so far a solution of this sort has been rejected.
Third, the European Central Bank (ECB) is uncomfortable with the idea of supporting governments through purchasing the bonds they issue. It is prevented by treaty from doing so on the primary market and, though it has made purchases on the secondary market, it is not keen to continue for very long. It sees it as a sort of quasi-fiscal operation with potential redistributive aspects it does not have a mandate to undertake. The ECB is also reluctant to provide credit to the EFSF against collateral and thereby to help leverage it, because its statute prohibits the monetary financing of public entities.
As long as these constraints prevail, fiscal resources are scarce and monetary resources barely available. This is what makes problems of limited size – Greece – or seriousness – Italy – less tractable than they should be. This is also why Europe would welcome a helping hand from its partners through participation in the special purpose vehicle it has decided to set up.
For those contemplating support, there are two ways to see the situation.
The first is that Europe ought to be able to sort out its problems by itself and, that, provided there was a will, it would have the resources to do so.
The second is that support may after all be a good investment, because the series of constraints Europe has created results in the fiscal situation being worse, and appearing worse, than it is in reality. Both are true.
Jean Pisani-Ferry is director of Bruegel and a professor of economics at Université Paris-Dauphine