The headlines coming out of the weekend: “Italy warns Spain over budget”; “Germany ready to boost size of firewall”; "Europe’s bailout bazooka is proving a toy gun”; “Greek bond yields jump as trading in credit default swaps put on hold". And so on, and so forth.
Bets on Intrade.com, recently, put the odds of the European fiscal union cracking apart by the end of 2013 at a little more than 36 percent.
There are all sorts of scenarios that picture the demise of the current arrangement.
But, there is one major thing that seems to keep holding the union together: the fact that the cooperative structure added to the common market has provided the vision of an economic bloc that can be competitive in this modern world with the other major economic areas of the world like America, China, Brazil, Russia, and India.
Combination is better than separation. Yet, the path to deeper integration and greater centralization of the fiscal authority is ugly. One reason for this is that the countries of the eurozone have centuries of history, of wars, of hatred, of irrational biases to get over.
As the recent movements on the Greek crisis showed, the shadow of the past was not far from people’s minds as references to the Nazis and German domination bubbled up into the debate.
The past is not going to be forgotten…and there is a lot of it.
Yet, here in the 21st century, the economic reality of the situation, I believe, will win out. The eurozone will hold together for the alternative, small, separate states competing against each other and “biggies” of the world, is not a real choice. And, most officials in Europe, I believe, realize this.
One continuing problem in the effort is that these European officials repeatedly fail to “get their arms around a situation”.
The “good” news over the weekend: “Germany is set to bow to international pressure and allow a temporary increase in the eurozone’s financial ‘firewall” this week, to prevent the crisis in the region’s periphery spreading to other member states.” (See “Germany ready to boost size of firewall” cited above.)
The “bad” news: the “rescue umbrella” is not big enough.” (See “Europe’s bailout bazooka…” cited above.)
The “umbrella” may be able to handle any problems coming from the smaller states, like Greece and Ireland, but it would not be able to handle Spain…or Italy.
The Italian prime minister, Mario Monti, is concerned about this and warned Spain that it should not back off from fiscal efforts and weaken its “budget-cutting credentials.” (See “Italy warns Spain…” cited above.)
But, financial markets still reflect the uncertainty about what is happening. Greek bond yields reached new post-bailout highs on Friday as yields on Portuguese bonds remain quite high and those on Spain’s bonds rose by about 30 basis points toward the end of the week.
The rise in the yields on Greek debt spilled over to the credit default swaps market as investors showed fear that the CDS trigger process might be subject to some immediate payout problems. There was additional concern that this issue could impact other eurozone bond markets.
So, the process of integration continues. And, as mentioned above, the process is not pretty.
It is hard for sovereign nations to give up their fiscal powers, especially when their elections are so dependent upon the “free lunches” that politicians promise to the voters. Yet, this is where events are leading.
It is going to be a bumpy road and there are many ways that the “end game” could be played out, but, in my mind, one way or another, the euro will survive and Europe will eventually prosper because of it.