Integration, but not with your debt!
The debt cocktail in the eurozone is becoming more poisonous and it will take more than George Osborne to call for fiscal union. It will take a level of political bravery that Europe is not renowned for to contain the problems.
Contagion is the word all European policy makers fear; the idea that their neighbours’ problems could spread to them.
This seems particularly odd if you consider the level of integration and interdependence in the EU that most pro Europeans hail as the great success of Europe.
Yesterday morning, the leading headline on most news channels was that the French bank Société Générale has been downgraded in its outlook by Moodys’ rating agency from Aa2 to Aa3. This move comes as investors begin to fear the levels of exposure other EU states and their banks have to toxic debt within the eurozone.
But this shouldn’t come as a surprise. The Euro itself has depreciated by 1.47 percent in the last month, whilst Italian bonds auctioned for maturity in 2019 and 2020 fetched 5.6 percent interest, up from 4.3 percent on the previous auction.
The figures are all pointing in one direction. Namely that some of the weakest members of the eurozone, mostly probably Greece will default and nobody seems to know what the consequences will be.
Political leadership has been weak from the beginning. As soon as a deal was supposedly done in the early summer to arrest the worries of the markets, the European Commission President, José Manuel Barroso sent a letter to EU leaders informing them that “Sovereign debt is of deep concern”. How did he expect the markets to react?
With contagion so clearly evident across the eurozone, George Osborne, paradoxically seems to be the only person promoting fiscal union.
With Greece today paying 24.7 percent interest on its 10 year money, nobody believes that it will ever be able to pay off the interest, let alone the debt. Mix this scenario with the endemic problem that the European Central Bank (ECB) has lent Greece 84.8 billion euros, which is the equivalent of 17 per cent of the assets of the Greek banking system and there is a real chance of it going insolvent.
The debt cocktail in the eurozone is becoming more poisonous and it will take more than George Osborne to call for fiscal union. It will take a level of political bravery that Europe is not renowned for to contain the problems. With elections in France and Germany not far away, the risk is becoming more critical.
Whether eurobonds, or great fiscal control by a new EU institution are the answer, I don’t know. But the markets are worried.
Anthony Pickles is a Parliamentary researcher and a Conservative activist.
We are wholly dependent on the kindness of our readers for our continued work. We thank you in advance for any support you can offer.