Technically, one can solve the problem even now, but the options are becoming more limited. The eurozone needs to take three decisions very shortly, with very little potential for the usual fudges. First, the European Central Bank must agree a backstop of some kind…. The second measure is a firm timetable for a eurozone bond…. The third decision is a fiscal union. This would involve a partial loss of national sovereignty, and the creation of a credible institutional framework to deal with fiscal policy….
I am hearing that there are exploratory talks about a compromise package comprising those three elements. If the European summit could reach a deal on December 9, its next scheduled meeting, the eurozone will survive. If not, it risks a violent collapse. Even then, there is still a risk of a long recession, possibly a depression….
It's that third decision point that Munchau brings up that scares me. That's exactly what Asariel's wife said (and she knows a few things about large budgets and macroeconomics), that a collective currency without a united fiscal policy was never going to work, and that the individual European countries would never agree to such loss of sovereignty.
Munchau is taking that a step further. If they don't agree to that, the euro is going to implode. Furthermore, that implosion could come in a matter of days now, not weeks or months. It's some very sobering stuff, and Munchau doesn't believe that the Europeans and in particular Angel Merkel are going to be able to agree on doing it.
I cannot quite see how the German chancellor is going to extricate herself from these self-inflicted constraints….
I don't either.
I have yet to be convinced that the European Council is capable of reaching such a substantive agreement given its past record. Of course, it will agree on something and sell it as a comprehensive package. It always does. But the half-life of these fake packages has been getting shorter. After the last summit, the financial markets’ enthusiasm over the ludicrous idea of a leveraged EFSF evaporated after less than 48 hours. Italy’s disastrous bond auction on Friday tells us time is running out. The eurozone has 10 days at most.
Crash helmets, people. It's going to be an ugly winter.