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The cost of saving the euro has just risen and it is a price that no one may be willing to pay.
As the latest financial crisis unfolds, the future of the euro is now not only in the hands of European politicians but also in the hands of the U.S. and other major countries as well.
And European politicians as well as the European Central Bank have helped to put it there.
Over the last week, investor dissatisfaction with the second bail out for Greece has been nearly palpable as the bond yields of both Spain and Italy came under attack.
The prime ministers of Spain and Italy may have wrung their hands and declared how unfair it all was.
But, as for policy action? They did nothing.
Then along came the ECB. Last month, the central bank refused to take off its hawkish hat and made the highly-questionable move of raising rates.
Unfortunately, its soon-to-retire president Jean-Claude Trichet refused to take this hat off this time around.
His idea of calming already tense markets was to throw them a little bone in the form of an increase in market liquidity and a resurrection of the bank’s previous policy of supporting the bonds of peripheral debtors.
But, this was not enough.
Even as the euro sank Mr.Trichet failed to suggest that the bank’s rate rise last month was a mistake and, despite the higher debt costs for Italy and Spain, the ECB failed to buy their bonds.
Reports later on that several ECB members, including the Bundesbank, opposed even these bond purchases of Portugal and Ireland, showed just how out of touch the central bank was with market pressures and fears that the global slowdown will force a default.
These reports also showed that one of the key players in saving the euro, Germany, is also showing even less enthusiasm for propping up the single currency at this critical time.
With Chancellor Angela Merkel watching her popular support ebb away with each bailout, it does look that after helping to save Greece, Ireland and Portugal from default and financial disaster, Germany is starting to draw the line.
As financial markets around the world start to clock up losses the size of which haven’t been seen since the Lehman crisis, chances of the euro’s survival are falling rapidly.
Politicians and the ECB have to now prove to investors that they will stand behind the debts of Italy and Spain and, if needs be, increase even further bail outs for the other three.
The ECB will also have to provide reassurance that despite inflation-fighting mandate, the central bank will also take the growth prospects of the euro zone into account as without this the debt problems of the peripherals will once again go awry.
But, that probably won’t be enough either.
With euro-zone growth still so dependent on the global economy, the U.S. will also need to promote recovery now to keep the euro alive.
To this end, investors will be looking for more quantitative easing from the U.S. Federal Reserve as much as they will be looking to Germany and the ECB to prove that the euro is still a viable currency.
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Saving the Euro means throwing out the deadbeats from the Euro zone. Get rid of Greece, Spain, Portugal, Italy, and perhaps even France…and the new Euro zone, mostly northern and Scandinavian countries, will have a viable currency.
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