Friday, 29 June 2012

This summit could be different

My initial reaction to the latest emergency EU summit was "ho hum, another one". Perhaps, this one will be different.

Italy and Spain are holding up the €120 billion "jobs" package. They want the rest of the Eurozone to help bring down the punitive interest rates on new government bonds that both countries need to issue in order to keep their administrations afloat.

The first and perhaps most obvious question has to be where did the Europeans come up with an extra €120 billion. Since all the Eurozone is running up large deficits, the new money has to be new debt.

This leads us to a second question; since the Eurozone crisis stems from a growing sense that the Europeans cannot pay off their existing debts, how does the accumulation of yet more debt actually help. Relabeling the new borrowing as a jobs or growth package doesn't change anything fundamental. This package means more indebtedness and a bigger problem.

This brings us to the third and most disturbing question. Why did Italy and Spain feel the need hold up a package that everyone signed up for last week? In a word; desperation - things are getting really bad. Italy and Spain need some cash urgently and thought they could veto this package in order to squeeze out some additional money from Germany.

However, Germany is running a deficit too. Although German interest rates are lower, it cannot simultaneously finance the deficits of Spain and Italy as well.

One senses that the end is getting close.

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