ECB pays a premium for breathing space

DESPITE all the economic turmoil, the price of one commodity continues to rise inexorably. No, not gold, but breathing space. That is all the ECB has bought by entering the market for Italian and Spanish bonds – and it will pay a heavy price. Analysts at RBS think the ECB and the EFSF, the new Eurozone bailout fund that will soon become bond buyer of last resort, will eventually hold €850bn of Italian and Spanish bonds, equivalent to half of their traded debt.

Breathing space alone will solve nothing – it only pushes the day of reckoning back, in this case by a matter of months. As with all crises of union, the real climax will play out in one of two ways. Either the Eurozone will become closer than ever before, or it will split acrimoniously.

Through the issuance of Eurozone bonds, Germany and other rich nations could underwrite the debt of their profligate southern neighbours. In return, those countries would adopt painful reforms dictated by their paymasters. The union would be fiscal as well as monetary.

Then there is a split, most likely along a rough north-south divide. A new euro would be created for Club Med, allowing them to devalue and regain a degree of competitiveness. Banks would be left nursing huge forex losses, but at least they would not have to use the dirty “d” word.

But the politics could prove intractable. Which currency would France adopt, for example? The idea of Sarkozy admitting that the gallic nation really belongs with Greece et al is simply absurd.

So Eurozone leaders face a choice that would make Hobson blush, but it is one they must make nonetheless. For now, quite literally, they are simply borrowing billions of euros of time.