After the recent annual IMF-World Bank meetings in Washington, which brought together finance ministers and central bank governors of member countries, the euro zone's sovereign debt crisis is not any nearer a solution. Despite considerable pressure from other members, the leading European countries failed to draw up a specific bail-out plan that could stave off default by one or more eurozone countries. That is particularly unfortunate. Recent developments have conclusively established that the eurozone is not an island. Its fast-escalating problems can hardly be confined to its geographical boundaries, let alone the continent's periphery, as was imagined earlier. It is clear that the consequences of a sovereign default will have global ramifications. Even the more optimistic of predictions points to a banking-led liquidity crisis in the aftermath of a default by Greece. As banks dump their holdings of sovereign debt and pull back their loans, the global economy will face a severe credit crunch. Unemployment will rise and, along with it, social unrest. Large banks will cut back on their exposures even to countries not directly involved in the crisis. The U.S., already witnessing anaemic growth, will be dragged into a double-dip recession. The euro, as a currency, could be a significant casualty.
None of these need happen if the eurozone countries had a credible plan of action and, equally importantly, dynamic leadership. Much was expected from Germany, the eurozone's strongest and most influential economy, the very foundation of the euro and the only member with the necessary resources and stature to sustain it. Yet over the past two years, as Greece followed by Ireland, Portugal, Spain and Italy tumbled into a crisis, Germany has been a reluctant member of the rescue team, clearly unwilling to commit to the costs of deeper fiscal unity in the eurozone. One reason for Germany's inhibitions has been the way the monetary union — comprising 17 members, each with different goals and interests — stands organised. Every member has a veto and important proposals such as augmenting the European Financial Stability Fund need to be approved by their Parliaments. Political opposition to a greater integration has been the strongest in Germany. Although the ruling coalition lost in some recent state elections, the Bundestag vote that Ms Merkel convincingly won on Thursday to increase Germany's commitment to the eurozone rescue fund is clearly a measure of her own domestic political strength. Whether that delayed action will be enough to shore up the euro and the many wobbly economies on the continent is yet another matter.