Less than two weeks ago it was still conceivable Berlusconi might hang around until elections in February but there’s nothing like a bond market blowout to concentrate minds. A day later he stepped down.
At that point the European Central Bank (ECB) decided to step in to bring yields back down again, hitting 6.3 per cent last Monday. But then with signs of Monti having problems getting cross party approval for the makeup of his cabinet, the ECB sat back and yields started to rise. On Wednesday Monti had his cabinet, confidence votes were assured and the ECB was again in heavily trying to cap the increase.
The pattern is set. Do the right thing and you'll get support, don’t do it and you’re on your own. It’s a strong arm strategy that we first saw used over Greece. Here Europe’s leaders moved from doing whatever was necessary to protect the euro, to publicly saying; “Yes it’s possible to leave.” But this is a high risk strategy.
Admitting the euro can break up means investors will start pricing that in, which is exactly what’s happening with rising core bond yields.
The biggest danger is this fast becomes a runaway train that nobody can stop. Germany refuses to countenance the answer is fiscal transfer. For Germany the ultimate end is fiscal union, where all budgets have been centrally approved and, to qualify, every member has to become like them. Quite apart from whether this is the right economic structure for Europe, how do we get to this Utopia?
The Germans insist it’s only by wince inducing reform. But remember youth unemployment rates that are already well over 40 per cent in Spain and Greece, and close to 30 per cent in Ireland, Portugal and Italy.
The Germans and the Eurocrats seem to think the people of Europe will put up with anything to keep the euro if they can sell the idea that the crisis will be used to create the type of currency zone we should have had in the first place. Recent polls in Greece show 70 per cent want to stay in the euro. Even in Italy, quite a few individuals told me they’d be happy to have the Germans run things, on the basis that at least the sums would add up and there’d be no corruption.
It’s quite a theory. I’ve got a feeling it will be tested to destruction.
Ross Westgate is co-anchor of CNBC’s Worldwide Exchange.