I am having my last day of holiday in the sun of Cuba and I am shocked to see how the Eurozone crisis has worsened again (it was of course never resolved). This time it might well be game over. Not only is it almost impossible to see how Greece could escape the debt spiral it is in with an economy contracting by more than 5% this year alone and more and more austerity measures in response. It is also the recent decision of the German constitutional court that has effectively ruled out a political solution to the Eurozone crisis.
The Financial Times‘ Wolfgang Muenchau, one of the most knowledgable Eurozone commentators, has mulled over the ruling of the German constitutional court and concluded that the court has basically ruled out both necessary political steps to resolve the crisis: Eurobonds and a closer fiscal union. He expects serious consequences:
What does this mean? First, the ruling significantly increases the probability of default by one or several member states. This is a simple consequence of the Law of Large Numbers. There are now so many hurdles in place that a systemic accident is very likely to happen at some point. Do we really think the Bundestag, after having reluctantly accepted the need for a second Greek loan programme, will vote for a third? Or a second Portuguese or second Irish programme? Will they vote Yes once the EFSF starts buying bonds, or recapitalising banks? It takes a single No vote to trigger a default. When that happens, there will be no time left for diplomacy.
The lack of political leadership in this crisis has also seemed different in recent weeks. To me it more and more looks like the problem is no longer that political leaders are not willing to act decisvely; I more and more think they are – for various reasons including the one above – incapable of acting. If this is true it means that the crisis is out of control as all measures with bite are out of reach.
We are heading for an iceberg and have apparently lost our steering system. It might get ugly soon…