By a wide majority, Germany's parliament just agreed to expand Europe's bailout fund. This sounds like a big deal: Germany's rescuing Europe!
But Germany isn't rescuing Europe. It's just signing off on a bailout plan that Europe's leaders agreed to months ago — a plan that clearly won't be enough to solve Europe's problems.
So the implications of today's vote were asymmetric. A rejection from Germany would have meant immediate economic chaos in Europe and beyond. German approval only means that Europe can continue to muddle through for a few more weeks or months, until the next phase of the crisis.
Specifically, there are three huge problems that the current bailout plan doesn't solve.
1. Even after the bailout, Greece still won't be able to pay its debts. The current plan cuts Greece's debt by 20 percent. This is not nearly enough. It leaves Greece with the biggest deficit in Europe, relative to its overall economy. And that deficit will continue to grow, as Greece's wrecked economy shrinks and the country continues to borrow borrow more money.
2. No one trusts Europe's big banks. U.S. money market funds have been pulling money out for months. Long-term lending to the banks is lower than its been in more than a decade. And the big European banks are even getting more nervous about lending to each other. This is a slow-motion bank run. If it continues, it will at least force the banks to choke off lending. Or it could cause another financial crisis.
3. Italy is way too big to be saved by the expanded bailout fund. Italy owes roughly as much money as as Spain, Greece, Portugal and Ireland combined. Its borrowing costs shot up recently, and only came down when the European Central Bank started buying Italian bonds. This is a temporary measure.
In one sense, there's a clear solution to each of these problems.
Force holders of Greek bonds to take a bigger loss; force European banks to raise more money (from the private sector if possible, from the public sector if necessary); and expand the European rescue fund so that it's big enough to save Italy.
But the details are muddy. There's debate over who is going to be on the hook for losses. There are lots of proposals for all kinds of crazy financial engineering to make this stuff happen.
The politics are even muddier. When European leaders agree to a plan, every country in Europe has to sign off on it. The vote in Germany's parliament today was to approve a plan that European leaders agreed to months ago.
The European Union wasn't designed to handle this kind of massive, fast-moving crisis. There's not enough centralized authority to make big, quick decisions. This is a fundamental, structural problem. And until it's solved — until Europe becomes more integrated, or the euro falls apart — leaders will struggle to make the kind of decisive moves necessary to end the crisis in Europe.