European leaders agreed last week — at last — on a comprehensive plan to tackle the euro-zone debt crisis. The plan consists of three pillars — a real "haircut" by Greek debt holders, an infusion of capital into the European bailout fund and recapitalizes European banks. The program could break the back of the euro-zone crisis, if it is implemented with all due haste. Thus far, the record gives little reason for optimism. But for once, at least, a genuine solution appears to be on the table.
Europe has been moving toward financial catastrophe — and the potential collapse of the euro itself, which could, like dominoes, take down the dream of a united Europe — for months. The catalyst has been the Greek financial crisis. A nation that has lived beyond its means for years, Greek debt has reached 160 percent of GDP; if current trends continue, it would reach 180 percent of GDP by 2020. Yet Greek debt is held by other European financial institutions. If Athens could not repay its bills, then a default would drag those banks down as well. That concern prompted markets to look hard at other sovereign debtors and Italy, a far larger economy, appeared vulnerable too. The prospect of contagion, both among sovereign debtors — governments — and the continent's banks, compounded a bad situation.
European leaders have been divided on how to respond. While recognizing that Greece had to live within its means, they also acknowledged that a default would hurt their own banks. Germans in particular have been conflicted: they do not want to encourage moral hazard and are especially troubled by bailing out Greeks with their hard-earned savings, but German banks are also quite exposed.