'The eurozone has 10 days at most'

Rick Moran
That is the extraordinarily grim forecast from the Financial Times' Wolfgang Münchau. In essence, he doesn't think that the euro zone leaders - especially Angela Merkel - will do what is necessary to save the euro and keep the entire European Project from unraveling.

What must be done?

First, the European Central Bank must agree a backstop of some kind, either an unlimited guarantee of a maximum bond spread, a backstop to the EFSF, in addition to dramatic measures to increase short-term liquidity for the banking sector. That would take care of the immediate bankruptcy threat.

The second measure is a firm timetable for a eurozone bond. The European Commission calls it a "stability bond", surely a candidate for euphemism of the year. There are several proposals on the table. It does not matter what you call it. What matters is that it will be a joint-and-several liability of credible size. The insanity of cross-border national guarantees must come to an end. They are not a solution to the crisis. Those guarantees are now the main crisis propagator.

The third decision is a fiscal union. This would involve a partial loss of national sovereignty, and the creation of a credible institutional framework to deal with fiscal policy, and hopefully wider economic policy issues as well. The eurozone needs a treasury, properly staffed, not ad hoc co-ordination by the European Council over coffee and desert.

Just what does creating a "fiscal union" mean? It means that Brussels will, for all intents and purposes, take control of the national budgets of member states. Munchau calls this a "partial loss of sovereignty. I suppose that's accurate - except its the most important part of sovereignty.

The plan would place enormous power in the hands of EU bureaucrats as well as the central bank. And its success or failure rests on just how committed the Germans are to the idea of a United Europe. Other nations - even France - don't matter now. Only Germany is big enough and strong enough to impose a solution. And right now, Merkel is balking.

How serious is the crisis? The Wall Street Journal reports:

Companies that provide the plumbing for the $4 trillion-a-day foreign-exchange market are testing systems that could handle trading of previously shelved European currencies. ... Banks, analysts and investors are preparing for what many of them say is an increasing likelihood of a euro-zone breakup, either completely or in parts, leading to the potential return of currencies such as the drachma, German mark or Italian lira. (HT: Calculated Risk)

Munchau concludes:

I have yet to be convinced that the European Council is capable of reaching such a substantive agreement given its past record. Of course, it will agree on something and sell it as a comprehensive package. It always does. But the halt-life of these fake packages has been getting shorter. After the last summit, the financial markets' enthusiasm over the ludicrous idea of a leveraged EFSF evaporated after less than 48 hours.

Italy's disastrous bond auction on Friday tells us time is running out. The eurozone has 10 days at most.

Many analysts appear to be taking the position that the best we can hope for is more can kicking by Merkel and Sarkozy as they struggle to redefine the entire concept of a union of european states. They are trying to do it on the fly, hurriedly, and with little thought to the long term consequences. But as long as Merkel resists the idea that the European Central Bank should act like a real backstop against disaster, it won't matter because there won't be any long term consequences to worry about. The EU will be gone and with it, the dream of a united states of Europe.

That is the extraordinarily grim forecast from the Financial Times' Wolfgang Münchau. In essence, he doesn't think that the euro zone leaders - especially Angela Merkel - will do what is necessary to save the euro and keep the entire European Project from unraveling.

What must be done?

First, the European Central Bank must agree a backstop of some kind, either an unlimited guarantee of a maximum bond spread, a backstop to the EFSF, in addition to dramatic measures to increase short-term liquidity for the banking sector. That would take care of the immediate bankruptcy threat.

The second measure is a firm timetable for a eurozone bond. The European Commission calls it a "stability bond", surely a candidate for euphemism of the year. There are several proposals on the table. It does not matter what you call it. What matters is that it will be a joint-and-several liability of credible size. The insanity of cross-border national guarantees must come to an end. They are not a solution to the crisis. Those guarantees are now the main crisis propagator.

The third decision is a fiscal union. This would involve a partial loss of national sovereignty, and the creation of a credible institutional framework to deal with fiscal policy, and hopefully wider economic policy issues as well. The eurozone needs a treasury, properly staffed, not ad hoc co-ordination by the European Council over coffee and desert.

Just what does creating a "fiscal union" mean? It means that Brussels will, for all intents and purposes, take control of the national budgets of member states. Munchau calls this a "partial loss of sovereignty. I suppose that's accurate - except its the most important part of sovereignty.

The plan would place enormous power in the hands of EU bureaucrats as well as the central bank. And its success or failure rests on just how committed the Germans are to the idea of a United Europe. Other nations - even France - don't matter now. Only Germany is big enough and strong enough to impose a solution. And right now, Merkel is balking.

How serious is the crisis? The Wall Street Journal reports:

Companies that provide the plumbing for the $4 trillion-a-day foreign-exchange market are testing systems that could handle trading of previously shelved European currencies. ... Banks, analysts and investors are preparing for what many of them say is an increasing likelihood of a euro-zone breakup, either completely or in parts, leading to the potential return of currencies such as the drachma, German mark or Italian lira. (HT: Calculated Risk)

Munchau concludes:

I have yet to be convinced that the European Council is capable of reaching such a substantive agreement given its past record. Of course, it will agree on something and sell it as a comprehensive package. It always does. But the halt-life of these fake packages has been getting shorter. After the last summit, the financial markets' enthusiasm over the ludicrous idea of a leveraged EFSF evaporated after less than 48 hours.

Italy's disastrous bond auction on Friday tells us time is running out. The eurozone has 10 days at most.

Many analysts appear to be taking the position that the best we can hope for is more can kicking by Merkel and Sarkozy as they struggle to redefine the entire concept of a union of european states. They are trying to do it on the fly, hurriedly, and with little thought to the long term consequences. But as long as Merkel resists the idea that the European Central Bank should act like a real backstop against disaster, it won't matter because there won't be any long term consequences to worry about. The EU will be gone and with it, the dream of a united states of Europe.