Economic Outlook: Europe's finite firewall

There are enough signals from Spain to conclude that Europe's troubles are far from over -- and that the firewalls need a significant boost.

To choose Spain, of course, is to pick one of several countries still capable of putting enormous strain on the region's economy and, singularly, on the euro, which is the currency shared by 17 nations as a subdivision within the 27-member European Union.

This week, the Organization for Economic Cooperation and Development urged European leaders to increase the financial firewall protecting the economy to $1.33 trillion.

The funding is already most of the way there. The initial funding pool -- the European Financial Stability Fund -- was assembled to help Greece, Ireland and Portugal. The problem was not just that it was too small, but that it was set up as a temporary fund. That put Europe in a bind, again, which led to the creation of the European Stability Mechanism, which had the advantage of being a permanent fund. But, then again, it wasn't large enough.

Combined, the two funds created a firewall of $923 billion, and that became viable when Germany's Chancellor Angela Merkel agreed to allow the two funds to run together -- "parallel funding" being the terminology of choice these days.

To do that would allow Germany to go back to the public and request more funding. Already, The New York Times reported, Germans put in a disproportionate share of the funds for the European Financial Stability Fund. Germany, since then, has been leading the call for financial discipline -- with considerable success, it should be said.

What's wrong with this picture? Spain has recently backed away from financial targets it had pledged to meet by the end of the year. Portugal is struggling to keep up with its financial goals. The serious and prolonged recession in Greece makes it highly doubtful it will glide through its own agreements with the international powers that be.

In effect, what's wrong is that no firewall is large enough if Europe returns to a prolonged recession. Like loaning money to someone who is about to lose a job, the numbers can't add up. Europe is still in trouble, despite recent accolades for its efforts to turn things around.

In international markets Tuesday, the Nikkei 225 index in Japan gained 2.36 percent while the Shanghai composite index in China fell 0.15 percent. The Hang Seng index in Hong Kong rose 1.83 percent while the Sensex in India rose 1.2 percent.

The S&P/ASX 200 in Australia rose 0.9 percent.

In midday trading in Europe, the FTSE 100 index in Britain slipped 0.2 percent while the DAX 30 in Germany gained 0.36 percent. The CAC 40 in France fell 0.58 percent while the Stoxx Europe 600 was flat, falling 0.08 percent.