At the European Summit, Italy, France, and Spain did their best to gang up on Germany, but didn’t get much in return. Merkel is still vehemently opposed to euro bonds, and I don’t see that changing, no matter what.
Italy and Spain will find it easier to get aid from the European bailout fund (the European Stability Mechanism or ESM), but the ESM didn’t get any more money. Its maximum is still about $633 billion, when Italy and Spain owe about five times that amount.
The ESM will put money directly into Spanish banks rather than using the Spanish government as a pass-through. And private bondholders of Spanish banks won’t be subordinate to government bond holders.
Such tiny steps have failed to satisfy the markets in the past.
By refusing to “go big,” Europe’s leaders are setting up the euro zone to go bust.
Yesterday the “risk premium” for ten-year Spanish bonds versus German bonds grew to 5.1%, the biggest difference since the euro was born. The divide between Spain and Germany, and not just on bond rates, grows wider each day.
Solutions exist — euro-wide deposit insurance, like our FDIC, to stop bank runs; euro bonds as a parallel system to country-specific bonds that would offer lower interest rates, but also lower risk. Merkel said they are studying euro bonds, but that’s like when we were small and our parents said, “We’ll see.” “We’ll see” always meant no. Solutions delayed are simply solutions denied.
No one knows where or how this will end. I think what we can predict is that economic events will overtake political leaders.
This is the moment before all hell breaks loose. It’s frustrating to watch the moment slip away. A controlled crisis is always better than an uncontrolled one.