The Euro-Zone Crisis is Speeding up

By IAIN MARTIN

Remember when all the focus was on whether or not Ireland would deign to take a bailout? That was only late last week. So much has happened since then in the fast-moving euro-zone crisis that Ireland already seems an age ago. The story is speeding up.
Portugal is next in the queue. Not so fast says EU President, Herman Van Rompuy, whose running commentary is becoming unmissable for all the wrong reasons.
Here he is on Tuesday on a visit to Stockholm. "Portugal does not need any help, it is in a very different situation to Ireland. Portugal has not suffered from a housing-market bubble, its financial sector is not oversized and its banks are well capitalized."

Associated Press

Irish Finance Minister Brian Lenihan in Brussels last Wednesday.

Yes, but that is not what is exercising the markets with regards to Portugal. The country's government reported Tuesday that its deficit had worsened in the first ten months of this year, with a 2.8% increase in government spending compared to the same period last year. The Irish bailout was supposed to alleviate pressure on Portugal and others. In the event it seems to have bought those in charge of the European project only about twelve hours of improved market stability.
Already attention is shifting to Spain. Making up around a tenth of the European economy it is of an entirely different order to plucky Portugal and little Ireland. The Spanish government says it doesn't need a bailout (a statement that is now mandatory fare for finance ministers but seems not to make much difference). And the central bank pointed on Tuesday to the health of Spain's powerful banking sector.
Spain is supposed to be the firewall in the euro zone. In theory, bailouts of Greece, Ireland and Portugal can be borne, but if Spain were to need a rescue then the crisis tips into the territory in which it is conceivable that the euro zone could blow up.
Spain is the line it is said that German taxpayers will not cross. If they balked at assisting Spain and a German government did not participate then the euro starts to break up. It is hard to see such an eventuality having anything less than horrendous implications, including default, chaos and widespread penury.
Can the crisis be stopped short of Madrid, the euro saved and terrible consequences avoided?
It will likely require much closer integration of the euro-zone countries that goes beyond what is currently on the table. Full-scale political integration is what is being contemplated but it is unclear whether, if Germany formally demands it, it will be viable or capable of gathering support in individual countries with their fractious and soon-to-be-frightened electorates.
But it is worth remembering that it is not just individual economies and a currency that are under pressure. Several big ideas are being stress tested here.
First, the bailing out and unlimited guaranteeing of banks—a major factor in the Irish end of the crisis. The orthodoxy that established itself after the collapse of Lehman Brothers stipulated that the inter-connectedness of financial institutions made it unthinkable that major players should be allowed to fail. That was the logic of the panic of late 2008 and early 2009.
Angela Merkel, the German Chancellor, says that this has gone too far, and that eventually bond holders and institutions must
take a share of the pain. But the result of her comments on the matter was an acceleration of the crisis in Ireland and eventually a giant loan to bail out the Irish banks.
It seems that once you start bailing out banks it is difficult to stop, and if you accept the theory of inter-connectedness then is there anything large and financial you won't rescue to buy a bit of stability, even if it is for half a day?
Then there is the late 20th century idea of closer European integration itself, or more specifically the Mitterrand-Kohl idea of Europe that emerged from the rubble of the Cold War. The European political class has invested heavily in what started out as a co-operative exercise in the 1950s but in time has become something else: a great cause to unite a continent say its supporters, a political grand project that was always going to collide with market realities say its critics.
Sometimes big ideas fail. And history suggests that right up until the moment that they do, very large numbers of people will maintain that failure is unthinkable.
Perhaps that is not about to happen in terms of European togetherness, and the crisis will slow down with order restored. But what is holding together the euro zone today? It is now no longer the dreams of an elite determined to construct a rival to the U.S. that could parley on equal terms with the emerging powers. Today it is being held together by simple fear of the alternative.



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