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"Six weeks to save the euro", European leaders promised the world in September. That deadline passed at last week's Cannes G20 summit with the goal looking further away then ever.
The significance of Ms Merkel and Mr Sarkozy's Cannes declaration [that Greece is free to leave the euro] is immense. At a stroke, they have introduced foreign-exchange risk into a sovereign-debt market still grappling with the realisation that eurozone government bonds contain unexpected credit risk. Worse, throughout the crisis, the two leaders said they will do whatever it takes to save the euro. Yet the assurances they've given haven't been worth the paper they were written on: First, there were to be no sovereign defaults; then the first Greek haircut was a "unique situation"; the second Greek haircut followed 12 weeks later; now eurozone exits are possible. No wonder the markets won't lend and China won't invest in Europe's bailout funds. Nothing these leaders say any longer carries any credibility.
All that can end Europe's debt crisis now is evidence that debt burdens are actually falling. Instead, the evidence suggests the eurozone economy is disappearing down a sink-hole. Without any mechanism for fiscal transfers, the weakest economies are being forced to tackle their debt problems through ever greater austerity, leading to a downward spiral.
Meanwhile the disarray in government bond markets has triggered a full-scale institutional run on eurozone banks, which have been shut out of key funding markers. So not only are the weakest countries trapped in an uncompetitive exchange rate but they also face higher borrowing costs too as banks cut back lending, adding to their competitiveness challenge.
What started as a financial crisis is now a full-blown political crisis in two eurozone states. If the eurozone is to survive, it is now clear it will only do so by increasing its democratic deficit. The economic policies of Southern Europe will in future be dictated by a Brussels-based technocratic elite, which voters will be asked to rubber-stamp on pain of economic ruin. What is also clear is that the one thing that has always seemed vital to any lasting solution to the crisis—large-scale fiscal transfers from Germany to the periphery and a willingness to underwrite future debt—looks less likely than ever. The euro will outlive its six-week deadline, but its long-term survival remains in serious doubt.