At this stage of the development of the debt crisis in the Eurozone, it is not premature to point to the lack of political will at both national and European level and to the institutional immaturity of the union as the main barriers to making effective decisions aimed at solving the growing pile of problems.
Unpopular solutions that were necessary for restoring the financial stability of different states were being and are currently postponed or indecisively implemented at national level. This is partly due to the search for a “vague” and difficult to define Pan-European plan for tackling the crisis. Despite the ever more regular “emergency meetings” of European leaders and their reassurances that the solutions are not that distant, the specific interests, needs and problems of member-states make the definition of a Pan-European answer to the crisis extremely difficult.
At the same time, the lack of political will for the implementation of hard decisions at the national level and the strong mutual dependency between Eurozone members create the feeling that while the problems are piling up at the periphery, the solutions are expected to come from Brussels.
Are Pan-European Solutions Possible?
Before the start of the crisis, the spread (the difference between yields) between German government bonds and the bonds of the other Eurozone countries was relatively narrow and stable. The mere membership of a country in the currency union was seen as a guarantee for its stability and solvency. For a long period of time, it alone defined market expectations about sovereign default risk. The expanding debt crisis in the Eurozone during the last three years put an end to this phenomenon.
The constant stream of new chapters in the Greek drama succeeded (to some extend) in diverting attention away from the elephant in the room – Italy. The political instability in the country and the weak growth of the economy did not escape the attention of bond markets, however:
- The spread between German and Italian bonds increased from 360 basis points on 16th October 2011 to 462 basis points on 2nd November 2011. In comparison, for most of the period between 1999 and 2007, the spread varied between 10 and 50 basis points.
- Far more important for the continuing instability in the Eurozone is the expansion of the spread between French and German bonds that, in the last two weeks alone, increased from 93 to 141 basis points – a difference, unseen since the introduction of the euro.
In this situation, the only surprise regarding the debut of the new ECB president Mario Draghi, was that the markets were surprised. It is not certain whether lowering the key interest rate will stop or delay the increase of the bond yields of the problematic Eurozone members and whether it will contain the widening spreads, as well as what its effect on the inflation rate will be.
The New European Reality
It is not too harsh to conclude that the debt crisis hit Europe at the worst possible moment of the integration process. Integration is at a crossroad – it is simultaneously too deep and insufficiently effective. European states need concrete formulas and solutions and the EU is too fragmented to provide them to its member-states.
It will be hard to restore investors’ confidence in the concept of a ‘united and homogenous’ Europe. As European politicians moved from one plan to the next and, every other month, ‘agreed to agree’, the markets systematically broke down the risk profile of the union. As far as key components of investment decisions (such as solvency, economic perspectives and political stability) are concerned, European states belong to different categories. The unprecedented widening of the spreads shows clearly that the market starts to value higher and higher one factor that is new for the EU reality– the independency and self-sufficiency of the sovereign states.