By Ezra Klein
30-Sep (Washington Post) — “Europe is approving a bigger bailout fund.” I feel like Wonkbook has included some version of this headline a hundred times. And here it is again. This time, the bailout fund is the European Financial Stability Facility, which is getting some new powers: it will soon be able to buy government bonds and lend directly to governments and banks. The problem is that it won’t have enough money backing its new powers to actually solve the crisis. This is a bit like empowering firefighters to go into burning buildings, but not giving them sufficient water for their hoses.

Europe is caught in a long bout of something that we’re very used to seeing after financial crises: extend and pretend. The underlying reality of their dilemma is that there are hundreds of billions — or maybe more — in losses for someone to take. If Greece and Ireland and Portugal take them, that means default and likely exit from the Euro. If they default, that means defaulting, in large part, on loans owed to German and French banks, which could cause a banking crisis in those countries. For them not to default, however, means that taxpayers in other European countries have to take those losses.

…The cost of denying the problem is to make the problem worse. But for Europe’s leaders, that is, at least for now, an easier price to pay. Actually fixing the problem might ultimately be cheaper, but it requires a wealth of political capital and continental unity that they simply don’t have.

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