It is interesting reading reports of the negotiations between France, Germany and the other Eurozone countries as they wrestle with the debts of various member states. The only way the eurozone could be called a single political entity would be if they issued joint debt instruments, for which they all accepted liability as one. But this is not happening.
The next stage of accepting responsibility for all the debts of their members would be if the countries of the eurozone underwrote all the debts, and guaranteed the exposures of bond holders. This would ensure confidence was maintained, at least, and would be the next best thing to a genuine amalgamation of the finances of all the eurozone’s countries. This was the intention of the shock and awe bail-out, as if saying ”no matter how big the debts are, we are bigger.” That too is proving to be beyond the reach of the eurozone. The debts are simply too big, and the amount being raised to pay them not nearly enough. There is now fatigue setting in, and a more honest approach is being taken. The creditworthy countries simply don’t want to carry the load any more.
As Germany finds herself as the country most able to raise the capital required to maintain such guarantees, it is not surprising that it is becoming politically impossible to do so. But still no one wants to pull the plug on the Euro. The humiliation will be too great to bear for the politicians who created it and supported it. They want to continue with the pretence that somehow the situation will come right.
This extract from an FT article gives the story of the eurozone meeting in Brussels on October 28th 2010 –
Mrs Merkel insisted that bond holders have to carry some of the risk of default in future.
This is tantamount to admitting that will be defaults, and it has had the effect of sending bond rates shooting up, and that in turn has brought the crisis back into the markets and the media, initially focused on Ireland.
After all his pro-Euro rhetoric in the past, it’s amazing that Sarkozy can with a shrug of his shoulders dismiss all thoughts of preserving the Euro, as that is going to impinge on accountability to each of their nations. It’s as if this was the moment when hope was given up, and reality was faced for the first time.
They will patch up Ireland as quickly as they can, but markets will not forget what has happened. The idea of all bondholders having an effective guarantee of no loss has gone. Eurozone unity is fracturing. The individual countries are re-emerging. Eurozone defaults are now inevitable. The period of Euro-optimism which began in the early 1990s and swept across the continent is now officially over, leaving fear for what will come next, as all that is left in their minds.