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Why, then, does [Merkel] appear oblivious to arguments from authoritative sources that a radical approach is needed to underpin the euro and avert a chain of debt defaults across the eurozone? Why is she wilfully deaf to the dire messages from the markets? Why, in short, is she gambling with the future of the euro and of the European Union?
There are many weaknesses to [Merkel's] current strategy, not least the absence of emergency measures to prevent the crisis from becoming a disaster. She needs time for Treaty change – and there is no time available. It is not remotely conceivable that investors will resume funding eurozone debt at sustainable rates while they wait two years or more for completion of a treaty-amending process. The reality is that eurozone countries have to sell tens of billions of debt over the next few weeks and months into markets that demand unprecedented returns, even for ‘safe' core members.
How long before astronomical yields plunge these countries' banks into convulsive liquidity crises, and their private sectors into the jaws of a credit squeeze?
The present crisis of market confidence in the eurozone and its leadership, and the threat of illiquidity and insolvency across the eurozone, is a dagger pointing at the political heart of the Union. The markets have to be convinced that investors in eurozone debt will be repaid. At the moment, there is only doubt and fear.
Investors would need to go through some kind of ‘road to Damascus' experience for Merkel's strategy to succeed and eurozone collapse to be avoided. The two most commonly discussed ‘solutions' challenge most people's faith in miracles. One is that the markets will, in effect, spontaneously cap the yields on the two countries now almost entirely at their mercy: Spain and Italy. They will do so out of greed – the yields will be so high as to be irresistible. Happily, they will then decline before the debt is so expensive as to be impossible for these countries to afford.
A second rush of optimism that might deliver us safe and sound from this dreadful crisis is discussed in a recent policy brief from Bruegel, a respected Brussels-based economic think-tank. Acknowledging the need to buy time and investors' patience while treaties are being amended, Bruegel proposed that eurozone leaders commit themselves to creating a fiscal union and issue a declaration before the end of this year “outlining the contours of such a process”. However, not even the authors believe this idea will instantly quieten the markets. They see the need for the ECB “to act more forcefully to contain the crisis”.
And they are not alone in that. The ECB is given a major role in virtually every rescue scenario for the eurozone. Too many of them involve actions whose legality under the ECB's current statutes would be dubious, even if the bank's president, Mario Draghi, and Merkel were forced by events to adopt them.
Next week's European Council has to wrap a long-term solution into an aggressive programme of immediate steps to restore stability to the debt markets. The well-being of billions may depend on it.
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