Europe debt crisis: Some fixes will take years

Markets want European leaders to find a convincing way to ease the eurozonedebt crisis by the middle of the week.

Fixes for the deeper problems that plague the monetary union, however, will remain on their to-do calendars for years to come.

The turmoil over some eurozone governments' excessive debt has exposed flaws in Europe's 13-year-old monetary union that are more complicated than Greece's admittedly disastrous decisions to spend and borrow too much during good times.

In the short run, officials must reduce Greece's crushing debt and cushion banks against the losses they would take on Greek bonds, measures they worked on over the weekend and are hoping to agree on by a second summit Wednesday. They also need to expand the financial firepower of their too-small bailout fund, so it can backstop countries such as Spain and Italy and reassure bond investors they can pay their debts.

When those steps are taken, however, the broader issues that let so much debt pile up will remain — and take years to solve.

If, that is, the 17 eurozone governments can ever come together on the answers, after struggling to find agreement on short-term patches during the 22 months since the crisis hit when Greece admitted it was broke.

The tough issues include chronic imbalances in both growth and trade between euro countries, who cannot even them out by shifting exchange rates, as non-euro countries can. Meanwhile, there are no proven, workable rules to keep countries from running up too much debt.

Most of the solutions proposed to such problems would require altering the fundamental European Union treaty, a process that could take years.

It was already known at the euro's launch in 1999 that differences in how fast economies grow presented a challenge. The euro has a single, central monetary authority, the Frankfurt-based European Central Bank, that can impose only one interest rate. A rate low enough to help a big country like Germany through a slow patch could contribute to inflation in smaller, faster-growing ones, undermining their export competitiveness.

That is exactly what happened during the mid-2000s, as the ECB held its key borrowing rate at 2 percent. The low rates boosted Germany and France, but in places like Greece and Ireland, Europe's so-called periphery, cheap credit helped enable irresponsible spending and lending booms that swelled salaries and prices.

The way countries within the eurozone trade with each other is also seriously imbalanced.

Germany is an export powerhouse, running an estimated trade surplus of 5.5 percent of economic output this year, while the troubled countries run deficits: Portugal 8.5 percent, Spain 4.5 percent, Italy 0.9 percent and Greece 4.2 percent.

The normal way countries adjust is through shifts in exchange rates. An exporter's currency appreciates, making its goods more expensive, while the importers can see their currencies fall and their industries become more competitive. That can't happen within the euro. Greece, Ireland and Portugal have to cut business costs and raise their export competitiveness through a brutal "internal devaluation," with a chief tool being pay cuts for government workers, which also undermines private sector pay.

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