With pressure mounting on European leaders to do something about the sovereign debt crisis engulfing the continent, we now seem to be approaching an endgame of sorts for the euro drama that has dominated headlines for the past year. As usual, Southern Europe is the epicenter, as bad news from Italy has sent investors scurrying yet again. The New York Times reports:
The Moody’s report came as anxiety intensified over Italy, whose borrowing costs have shot back above 7 percent in recent days despite promises by Mario Monti, the new prime minister, to enact a new austerity plan designed to reduce a mountain of debt.So nervous are investors that Italy might be on a slippery slope that the International Monetary Fund took the unusual step Monday of denying reports in the Italian press that it was in discussions with Italian authorities on a program for I.M.F. financing.
For all the frantic scrambling for miracle solutions, Europe is finding it harder to escape the cold reality: there is no easy way out; any euro rescue will be extremely costly and will involve political compromises unpalatable to both the thrifty north and the spendtrhift south. Now Italy needs a trillion dollar bailout, the I.M.F. is staying out, and its neighbors are all either unable or unwilling (or, in most cases, both) to pick up the tab. European leaders have thus far been willing to cover these gaping holes with chicken wire and spit, but these fixes are becoming less and less effective — conventional wisdom now holds that the Eurozone will implode without major reorganization.Time for these drastic changes is running out, however. The creation of eurobonds and the integration of fiscal policy across the eurozone are increasingly looking like the only possible options for preserving the single currency, but they have met stiff opposition from the European public — particularly in Germany, where Angela Merkel has her hands full developing a bailout plan that doesn’t trigger German’s fears of a “transfer union.” The smart money has assumed that Merkel would finally take the plunge when events forced her hand, but by that point it may already be too late. Wolfgang Muenchau sees the end fast approaching in a column in the Financial Times:
The banking sector, too, is broken. Important parts of the eurozone economy are cut off from credit. The eurozone is now subject to a run by global investors, and a quiet bank run among its citizens.This massive erosion of trust has also destroyed the main plank of the rescue strategy. The European Financial Stability Facility derives its firepower from the guarantees of its shareholders. As the crisis has spread to France, Belgium, the Netherlands and Austria, the EFSF itself is affected by the contagious spread of the disease. Unless something very drastic happens, the eurozone could break up very soon.[…]Italy’s disastrous bond auction on Friday tells us time is running out. The eurozone has 10 days at most.
If they want to rescue the euro, European leaders will have to act now. Without change, the life of the eurozone is now be measured in days, not weeks. As of this morning, the Intrade futures market puts the chance that one or more countries will leave the euro by year’s end at 50 percent.The thicket of political and technical problems that constrains the European response to the financial crisis is an imposing one; it is possible that even with much more decisive political action no comprehensive solution can be found at this time. This is the greatest crisis in Europe since the time of the Marshall Plan; may the Force be with Europe’s leaders as they look for a way out of the trap.