The quickening pace of the euro crisis indicates events are continuing to outrun the ability and willingness of policy makers to control it.
In our Special Report of July 13, 2012 entitled A “Two Euro Solution” to a Terminal Illness, we suggested that the euro should be split into two─a hard euro and a soft euro. More than ever we are convinced that this will happen, one way or another. The important question is whether it will be managed rationally before a market disintegration or whether a crisis will first be needed to force policy makers to throw in the towel. Unfortunately, there is precious little evidence that policy makers will ever get out in front of the crisis.
As we stated in our Two Euro piece, Germany’s strategy is to force the seriously troubled debtors out of the existing eurozone by imposing increasingly impossible funding conditions and institutional changes such as eurozone-wide independent banking supervision and tough fiscal monitoring. Not unimportant is the fact that the existing European Financial Stability Fund (EFSF) only has €500bn, of which €100bn has already been conditionally earmarked to bail out the deeply under water Spanish banks. The net amount in the EFSF is dwarfed by the funding requirements of the troubled debtors, amounting to between one and two trillion euros. Many commentators and troubled debtor governments continue to look to the ECB to buy collapsing sovereign bonds. However, this seems very unlikely as the ECB’s mandate is not to “resolve nations’ financial problems”. The ECB has spent more than €210bn buying sovereign bonds since 2010 and the crisis has only deepened.