Last week for the Euro?

It is going to be a challenge for half-measures to continue to keep the Euro rolling ahead of market speculators who will be closing in for the kill.

Here is the recipe for disaster:

(1)  Spain and Italy are paying over 6% per year on 10-year debt, while their economies are in recession or growing less than 1% per year (so their debt is growing many times faster than their economies).  That is what analysts call an “unsustainable situation,” meaning that sooner or later they will be unable to service their debts and default.  The only way to avoid this is for another entity to pay off or take over their debts and replace them with obligations at much lower interest (e.g. Eurobonds).

(2) The entity vital to doing this (Germany) says the following:  “German Chancellor Angela Merkel sought to bury once and for all the idea of common eurozone bonds overnight, saying Europe would not share total debt liability ‘as long as I live.’ http://www.smh.com.au/business/world-business/not-as-long-as-i-live–merkel-buries-euro-bonds-20120627-2117h.html#ixzz1yy6lEJkP

This will leave investors no choice come Monday but to dump Italian and Spanish debt or demand even higher interest rates, when both countries try to roll over 10 year bonds, as they will have to do very shortly.

There may be promises made this weekend to use Eurozone money to bail out insolvent European banks, but that is only half the problem, and not the most fundamental.  That fools no one.  I do not see how much longer this can go on.

(Note: Head of the Bank of England, Sir Mervyn King, is ‘tearing up’ his recent economic forecasts due to uncertainty over the Euro outcome.  And that is not even headline news!?).

 

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About jackgoldstone

Hazel Professor of Public Policy at George Mason University
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