Europe's $1-trillion rescue won't solve low growth, say analysts

BRUSSELS (AP) — A bold $1 trillion rescue by the European Union halted the slide of the euro on Monday and sent markets soaring worldwide in a gambit that may ultimately be seen as the moment Europe truly became a union.

Still, the package did not resolve the basic dysfunction at the heart of Europe’s monetary union: Governments can still spend recklessly and saddle their partners with the bill.

The approval of a “shock and awe” level rescue package followed weeks of indecision that hammered the euro and sent world markets plunging on fears Europe’s debt contagion could spread well beyond Greece, where the crisis began several months ago.

“For once the scope of actions unveiled dwarfed previous leaks and speculation. This is shock and awe Part II and in 3-D,” said Marco Annunziata, the chief economist at UniCredit Group.

“Europe has unequivocally said, ‘We will defend the euro’s integrity,’” said Oliver Pursche, executive vice president at Gary Goldberg Financial Services in Suffern, NY.

Analysts warned, however, that the emergency bailout fund would do nothing to reverse Europe’s soaring public debt - and could even worsen it.

“The last thing you give a drunk is another drink,” said Jeremy Batstone-Carr of Charles Stanley stockbrokers.

“The process of providing a bridging facility for Greece and possibly other indebted nations will add significantly to regional debt and deficit ratios without actually solving the underlying problem.”

EU officials said the next step was to more closely coordinate member nations’ economies, including tougher rules to keep them from running up too much debt. The eurozone has a limit on deficits of three percent of gross domestic product, but that was widely ignored.

“The key missing pieces ... are steps to strengthen fiscal discipline and structural reforms,” said economist Annunziata. “I remain skeptical on this front, as greater fiscal integration at this stage requires deeper political integration.”

After frantic talks lasting into the early hours of Monday, European officials agreed the 16 euro nations would put up $572 billion in new loans and $78 billion under an existing lending program. The International Monetary Fund will pump in another $325 billion, for a total package of nearly $1 trillion.

The European Commission is to raise the money in capital markets, using guarantees from member governments, and lend it to crisis-stricken countries so they can pay their bills.

Many questions were left unanswered, such as how the money would be dispensed and on what terms.

The crisis had also raised fears of a panic like the one following the collapse of US investment bank Lehman Brothers in 2008 and prompted nervous banks to cut back on lending to businesses and hammered stock markets.

A weaker euro and financial and economic disaster in Europe would hurt US exports, and the US Federal Reserve pitched in by agreeing to make dollars available to the European Central Bank in exchange for euros. The ECB will then loan those dollars at fixed rates to banks in Europe; the interest eventually goes to the Fed when it swaps the euros back for dollars at the same exchange rate as the original transaction.

European banks need dollars to lend to companies across the continent. European companies with operations in the US pay their employees in dollars and buy raw materials with the US currency. Also, oil and other commodities are priced in dollars around the world.

But because of the debt crisis, private banks in the US have been leery of making loans to banks in Europe. Hence the need for the currency swaps between the central banks.

Still, he noted, some experts argue the “current crisis is exactly what was needed to trigger a new quantum leap in European integration. I hope that turns out to be the case.”

European Union president Herman Van Rompuy said European governments need to consider pooling their national powers and create a joint economic government.

“We can’t have a monetary union without some form of economic and political union and that is our big task for the coming weeks and the coming months,” he said.

He said he would draft tougher rules for EU leaders to discuss in October that go beyond current EU limits on debt and deficit.