I'm old enough to remember when a big European summit was supposedly a big step towards solving the never-ending crisis of the common currency. That was last week.
And the crisis is still never-ending.
That didn't stop markets from indulging in a bit of euro-phoria in the interim. It was understandable. Europe's leaders said all the right things -- even if the details were a little hazy. First, Europe's leaders said that countries wouldn't have to borrow money from the euro bailout fund to bail out their own banks. Instead, the euro bailout fund would bail out banks directly. Second, they said that any bailout loans would not be senior to other loans.
It sounded like Europe's leaders were finally learning from their mistakes. The most obvious such mistake was Europe's wildly unsuccessful bailout of Spain's banks. Just weeks before, Europe had announced that they were piling €100 billion ($123 billion) into Spain's failing banks -- and then watched Spain fall apart faster than ever. That wasn't supposed to happen. But investors were wary due to concerns that the deal increased Spain's public debt, and perhaps made that debt riskier for private investors by subordinating it. Now, Europe was admitting they had gotten it wrong.
It sounded too good to be true. It was.
The chart below from Bloomberg shows the yield on 10-year Spanish bonds over the past month. After nose-diving immediately after the big summit, they have spiked back into the danger zone above 7 percent. It's one step forward, and two steps back.
Why did this latest bout of euro enthusiasm evaporate so quickly? Because Europe's leaders reversed themselves so quickly.
Remember how Europe was going to stop making countries bail out their own banks? The permanent euro bailout fund -- the ESM, which doesn't even exist yet -- would do that. The idea was to break the so-called "doom loop" between weak banks and weak sovereigns. Well, it turns out that was a lie. The ESM -- if, you know, it's ever ratified -- will buy shares in banks, but with a very, very big caveat. That caveat is that the bailed-out country will have to insure the ESM against losses. This is a little like the house-on-fire being ultimately responsible for providing the water. What does that solve?
Guess what? It turns out that ESM loans might still be senior to other debt too. Finland's finance minister helpfully insisted on this point -- although it was always dubious whether the promise to abandon seniority ever amounted to much. Greek bailout loans were never technically senior -- until there was a debt restructuring, and they suddenly were. Still, this abrupt about-face didn't exactly give markets confidence that Europe's leaders agreed on what needed to be done.
It gets worse. Europe conditioned doing these big things -- which they subsequently said they wouldn't do -- on doing something even bigger. That's creating a banking union. In other words, a pan-European bank regulator that acts like a combination of the FDIC and TARP. And that really means sharing each other's debts -- a non-starter for the Germans unless other countries cede control of their budget-making to Berlin.
In other words, Europe has declared they won't save the euro until they create a United States of Europe. As Wolfgang Münchau of the Financial Times pointed out, that means the euro crisis will last for 20 years. Which really means the euro crisis will end much sooner -- Spain and Italy will leave the common currency long before that.
But don't worry. There are lots more summits scheduled in the fall.