The endgame is approaching
By Phillip Souta
With a debt to GDP ratio over ten per cent lower than Germany’s (68 per cent compared to Germany’s 81 per cent), and a centre-right government serious about austerity, Spaniards will feel enormous frustration as their country is slowly priced out of the international bond markets. This, however, is what contagion looks like.
Germany is increasingly faced with a choice of supporting the eurozone or the possibility of seeing it unravel. Wolfgang Schäuble, the German finance minister, has said that eurobonds now would remove peripheral countries’ incentive to reform. If, as looks likely, the continued existence of the eurozone in its current form becomes the issue, Germany will be facing a different situation.
The Commission’s proposals for a European Banking Union (press release here) are a step in the right direction, but they are only that, with no provision for a severing of the link between sovereigns and their banking systems. Angela Merkel sees such moves as a backdoor to underwriting Spanish bank deposits. Again, if we are looking at the collapse of the eurozone, Germany will be facing a different situation.
This month is the latest in a serious of allegedly decisive months. Before all of Brussels and large parts of the continent break for a six-week summer there will be a two day meeting of European Heads of Government on the 28th. They will have quite a situation to survey.
The first big crunch point comes next Monday on 11 June when the IMF delivers a report on its banking sector. That will give decision makers a better idea of the state of Spain’s banks, and may cause the markets to turn even further against Spain, precipitating a bail out.
The biggest event will be Greek elections on 17 June, with opinion polls showing a six point lead for anti-bailout parties on the left, led by radical Syriza. If they win, it would probably be the end for Greece in the euro. The G20 will meet in Mexico, the next day on 18 June.
By this time we will be a step closer to the endgame. David Cameron has been right to voice his support for eurobonds, and should continue to make the case for them.