Investors have reacted negatively and Spanish 10 year bond yields have increase to well over 7%. Madrid is now paying 20% more for short term money than it was around 6 weeks ago! The market seems to be very seriously questioning the fiscal viability of Spain which is the Eurozone’s fourth largest economy.
We really need to start thinking about the break up of the Euro as it now stands. Italy is also teetering and the crisis is only just getting started.
A spokesman for the IMF (International Monetary Fund) recently said “the Euro area crisis has reached a new and critical stage”… “And financial markets in parts of the region remain under acute stress, raising questions about the viability of the monetary union itself”.
Without the Germans accepting Euro bonds whereby the Eurozone becomes a genuine loss sharing banking union the present system seems doomed to failure. Are the Germans likely to do this? Would the rest of Europe accept the terms of the Germans and polices necessary to keep the Eurozone going in its present state? Full fiscal union is probably politically unobtainable.
The underlying problems relate to excessive debt and uncompetitiveness of the southern states. With countries locked into the Euro there is no mechanism to resolve these problems.
One solution could be that Germany actually leaves the Eurozone – perhaps with other Northern Eurozone countries including Austria and the Netherlands.
This spilt would be along the lines of competitiveness. One interesting question would be whether France would join the group of Southern European counties who are largely less competitive countries than the Northern Countries. France’s recent economic performance would ally into the Southern states but politically the French are more likely to want to continue their close relationship with Germany.
There are many questions to be resolved to bring this crisis to an end but the sooner it does happen the sooner the global economy will benefit from a European currency with a future.
Written by Tim Corfield