The eurozone is now in an irreversible slide that will end in the dissolution of the 17-member monetary union. The frantic efforts of German and French leaders to create a makeshift fiscal union on-the-fly is just “too little, too late”. There’s neither the popular base of support nor the political will for a United States of Europe. And that’s not what German Chancellor Angela Merkel or French PM Nicholas Sarkozy want anyway. What they want is a swift end to the crisis that’s now reached the epicenter of the Europe and is pushing yields on German bonds higher.
The significance of last Thursday’s “failed” bund auction has not been lost on Merkel, who was deeply shaken by the results. If the bond vigilantes can make short-shrift of German bund, then no one is safe. And no one is safe. Yields are rising across the board, even in surplus countries like Netherlands and Finland. That means the focus has shifted from deficits to something even more basic, like survival. Investors are now pricing in the possibility a collapse of the eurozone.
So, what’s the endgame here? What needs to happen to save the eurozone from disintegration?
First, the ECB must be given a green light to provide a blanket backstop for sovereign bonds to keep rates down. Second, there must be some form of instrument (eurobonds) to collectivize debt in order to counterbalance capital flows from the surplus countries to the perimeter. Third, there must be greater fiscal AND political integration to establish the type of institutions that transform the 17-member confederation into a real country.
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