The markets have broken through one of the many weaknesses in Europe’s defences, prompting yet another collapse in stock prices and boosting the soaring interest rates which have exacerbated the sovereign debt crisis in the Eurozone. However, the markets are not solely responsible for a situation, which is symptomatic of a deeper political malaise.
If we do not find a solution to this problem, the survival of the European project will be jeopardy. This time around, the attack came via the breach opened up by the incredible delay in the implementation of decisions taken at the summit of European heads of government on 21 July.
If all goes well, these "urgent" decisions will only take effect at the end of September. And by then, their impact will be insufficient. On 4 August, at the precise moment when Commission President José Manuel Barroso was calling on governments to ensure the rapid implementation of decisions taken in July — an initiative that " clearly failed to have the desired effect" — the European Central Bank (ECB) was attempting to plug yet another leak in the good ship euro by announcing that it had voted "by an overwhelming majority" to resume aquisitions on the secondary market where it intends to buy up the soverign bonds of countries in difficulty.
The ECB reluctantly gave in
In May, Frankfurt had suspended this type of intervention, requesting that the responsibility should be transferred to the European Financial Stability Facility (EFSF). But given that the facility’s authorisation to act has been held up in Brussels, the ECB was once again forced to reluctantly throw its hat into the ring. Of course, there was majority support for the decision, but in all likelihood the Germans voted against it. In any case, it was not enough to calm the markets.
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As it stands, the current storm is destined to continue, or, at best, to recur at increasingly frequent intervals. And instability will prevail until national governments understand and acknowledge the need to reflect on what José Manuel Barroso described as the "complexity and incompleteness of the 21st July package."
If truth be told, everyone is aware that there is only one possible cure for Europe. But Angela Merkel’s Germany has stubbornly refused to sanction this therapy, and other government’s lack the requisite strength to make her change her mind, while for more than a year, the markets have continued to bet that the patient — i.e. Europe — will be dead before the necessary treatment is administered.
In spite of the complexity of the current crisis, the issue remains relatively simple: if European states remain attached to the principle of every man for himself on the bond market, and if we continue to apply different interest rates for bonds issued in the same currency, the markets are not wrong to be sceptical about the long-term existence of the single currency.
The only possible solution has been blocked by Germany
The solution, which has been accepted by a number of players, is to accept shared responsibility for public debt. This goal could be achieved, at least in part, by the issuing of a eurobond for a significant portion of European debt. The political trae-off for this manœuvre will be an end to national sovereignty over budegtary policy, which will be entrusted to a "European minister of Finance." And in passing, it should be noted that national governments currently to not benefit from much margin for manoeuvre on budgetary policy.
But until now this solution to the problem has been blocked by Germany, which maintains a high standard of public accounting and does not see why it should be made responsible for the enormous debts accumulated by countries like Italy and Greece. In a bid to circumvent the German veton, we have resorted to highly complex and largely inefficient mechanisms, like the European Financial Stability Facility (EFSF). But it is now obvious that this kind of measure only serves to attract more speculators, who continue to gamble on the difference between the interest rates on sovereign bonds. In recent months, many commentators have deplored "the selfishness" of the Germans and attempted to conjure up the spirit of "European solidarity."
In reality, the problem will only be resolved if and when Germany realises that an end to the euro and the single market and the accompanying financial catastrophe that this will imply, will prove to be a lot more expensive than a collective initiative to take control of sovereign debt. To date, no government has had the courage to corner Angela Merkel on this question.
The markets, however, have been quick to step in where politicians have been slow to act. Now that Italy is in the sights of the speculators, the question will have to be settled soon. If Germany says yes, the euro and Europe will be saved. If it does not, all of us — and that includes the Germans — will have to prepare for the worst.