Looking back on the summit to save the euro last week, I'm reminded of a conversation with an analyst earlier this year who gave me instructions for grading a deal to save the continent and the currency.
"First, it has to be humongous," he said of the hypothetical savior plan. "Second, it has to include steps that allow Greece to leave the euro. Third, it has to include the European Central Bank."
It's a matter of concern, then, that the deal reached in Brussels this past week was not humongous, had nothing to do with the ECB, and managed to create a divorce with London rather than Athens.
Medical analogies can be overused, but here one is instructive. Europe, as it exists, might be terminal. But if we're going to play doctor, the only prognosis for right now this very moment is that Europe requires a major blood transfusion that only a lender of last resort can provide. The Diet of Brussels emerged with a plan for, well, a healthier fiscal diet.
In real world terms: Europe needs more money, plain and simple. Its sickest countries are way, way past the point where a simple spending-and-taxing plan can save them. They need cash to pay their bills and guarantees to make their debt affordable. Last week's meeting came up with ... a plan for future spending and taxing. That's not money. In fact, it might even be a plan for less money.
Last week's agreement was about red ink. The countries in trouble -- like Greece, Italy, and Portugal -- are running large deficits. These deficits are scaring investors from European sovereign debt. As these countries' debt becomes harder to sell, credit tightens for all European banks and pushes up interest rates ... which, in turn, makes the debt more expensive and harder to sell.
Europe thinks the fastest way to shrink deficits is to cut spending. That's why last week's agreement leans on austerity for the weakest countries. But austerity doesn't lead to growth. By definition, it takes money out of the economy. If the entire continent cuts at the same time, the result will be a continental recession. Again: Less money.
An integrated Europe might have spared us the euro crisis in, say, 2006. But, as it's no longer 2006, it's far too late to pretend that the right spending-and-taxing mix will save them today. Instead, today's crisis requires investor confidence that only the ECB can provide with a bazooka shot of money -- the key transfusion. The next step will be the unwinding of Greece, which is so far gone that few people realistically expects even the ECB to turn around the country's math.
If there is reason for hope, it is this: The European Central Bank has the capacity, but not yet the will, to step in and guarantee the backing of bonds that could keep liquidity flowing to not only the peripheral countries but also the core European banks. Last week's agreement is not the final solution. But if it moves the weird internal politics of the ECB toward supporting a bold new vision of its powers as lender of last resort, it just might be the diet plan that made transfusion possible.