Saturday, September 25, 2010


BRUSSELS—Two months after Lehman Brothers collapsed in the fall of 2008, a small group of European leaders set up a secret task force—one so secret that they dubbed it "the group that doesn't exist."
Its mission: Devise a plan to head off a default by a country in the 16-nation euro zone.
When Greece ran into trouble a year later, the conclave, whose existence has never before been reported, had yet to agree on a strategy. In a prelude to a cantankerous public debate that would later delay Europe's response to the euro-zone debt crisis until the eleventh hour, the task force struggled to surmount broad disagreement over whether and how the euro zone should rescue one of its own. It never found the answer.
A Wall Street Journal investigation, based on dozens of interviews with officials from around the EU, reveals that the divisions that bedeviled the task force pushed the currency union perilously close to collapse. In early May, just hours before Germany and France broke their stalemate and agreed to endorse a trillion-dollar fund to rescue troubled euro-zone members, French Finance Minister Christine Lagarde told her delegation the euro zone was on the verge of breaking apart, according to people familiar with the matter.
The euro zone's near death had stakes for people around the world. A wave of government defaults on Europe's periphery could have triggered a new crisis in the international banking system, with even worse consequences for the global economy than the failure of Lehman.
The dangerous dithering was driven by ideological divisions that continue to paralyze the currency union's search for solutions to its structural flaws. Deep differences on economic policy between Europe's frugal north and laxer south, between Germany and France, and between national governments and central EU institutions hindered an effective early response to the crisis. Only when faced with calamity—the collapse of the euro zone—did leaders put aside their differences and reach a compromise.
Complicating matters: The two most important politicians deciding the fate of the euro often had conflicting agendas—and much at stake personally.
French President Nicolas Sarkozy, known in France as the "hyper-president" for his relentless flurry of new initiatives, faced declining approval ratings as his domestic economic overhaul stalled. The excitable 55-year-old leader saw that Greece's woes could rock the euro zone. Mr. Sarkozy seized on the issue as an opportunity to prove his leadership chops and thus shore up his popularity.
For German Chancellor Angela Merkel, 56, the crisis was the biggest test of her career. A trained physicist known for her cautious, deliberative style, she feared a backlash from German voters and lawmakers, and defeat in Germany's supreme court, if she risked taxpayer money on serial deficit-sinner Greece. Despite pressure from Mr. Sarkozy, she fiercely resisted a quick fix.

Wall street Journal

No comments: