After many months of negotiations among leaders in the eurozone, a deal was finally reached. If it works as planned, it could restore confidence in the Old World's financial system. If it fails to put an end to the solvency crisis in Greece, waves of panic might be triggered through the much larger economies of Italy and Spain. Even if this does not lead to a new recession, the slowing of the Continental economies will be a major hurdle to American and global economic recovery. Right now the chances for this particular plan to improve the economic health of the European Union look dim because it would be extremely hard to work out the details and because the Greek people seem determined to reject it.
President Obama was quick to cheer for the deal, urging German Chancellor Angela Merkel and French President Nicolas Sarkozy for a "strong execution of the plans that have been put forward." Obama realizes that his reelection chances will greatly diminish should European instability hurt some major American investments. With the rage against corporate welfare within both the Tea Party movement and the Occupy Wall Street crowds, it would be political suicide to try and sell a new bailout for our banks and automakers. And, with more than a fifth of our exports going to Europe, a financial panic on the other side of the Atlantic could cost us many jobs in the chemical industry or in companies like Boeing and Microsoft.
But there are legitimate concerns that even if the plan gets implemented by the end of the year, it may backfire. Jens Weidmann, the president of Bundesbank and a member of the European Central Bank's governing council, has been trying for months to draw the attention of his colleagues to the pitfalls of the proposed "solutions" to the debt crises of today. Among the warnings that he has issued is that bailouts of irresponsible governments (and corporations) weaken incentives to implement necessary reforms. Just as the leverage instruments that we blame for the financial collapse of 2008, the new European deal does little else than collectivize and temporarily mask the risks.