You cannot ignore the government debt markets for long. They have a way of muscling into the economies and the political stories of western Europe.
We need to get up to date with the interest costs each country faces for borrowing money for ten years:
The first three countries in the list are in special measures. They are in receipt of subsidised loans from the EU and IMF, as no-one thinks they can afford to borrow at current market rates. An early return to normal borrowing does not look likely, especially for Greece.
Germany and the EU Commission are using the crisis to strengthen controls on the budgets of these countries. Yesterday Mrs Merkel had to warn Greece that their conservative opposition party had to sign up to the austerity package as well as the government, before the EU would release the next tranche of money they need to pay the bills. Germany is working closely with the EU authorities on measures to tighten and enforce budgetary discipline on Euro area members.
Italy, Spain and even Belgium are now in the zone where they could be forced in to seeking subsidised loans from the EU/IMF combination. Italy has already submitted to IMF surveillance of its budget, and has imposed a technocrats government on itself at the request of EU leaders. Spain has just elected a new conservative majority government on a platform of imposing greater austerity, but this has not yet impressed the bond markets who want proof that the deficit is going to come down and stay down. All three countries are going to need to impress and deliver some better figures to get their market rates down.
France and Austria have now detached from Germany, and have to pay considerably more than their German neighbours. France’s credit status remains AAA officially, but the markets are now treating it differently from Germany and the UK. Yesterday, for the first time, the markets even dared to question the safe haven reliable status of German debt. Around one third of the 10 year bond offered at 1.98% was left without buyers. More in the markets are now asking how safe Germany’s credit status will prove, if Germany is dragged into offering more support for the weaker parts of the zone.
Germany has for the time being ruled out the issue of Euro area bonds, backed by all the Euro area governments. This might enable the weaker areas to borrow at a much lower average rate than they can command. However, Germany did sign up to the EFSF. This is a Luxembourg company with the power to borrow using the credit standing of the Euro area countries. This vehicle has struggled to raise large sums at rates close to Germany’s, implying some technical and marketing difficutlies with Euro area debt anyway.
Mrs Merkel is right to say you cannot solve a debt crisis by borrowing more. Her critics are right to say you may not get growth in the weaker countries if all you do is cut spending. This might keep the deficit high as tax revenue falls. It should fall to experts who like the Euro and think it can be easily saved to tell us all how you pull off the trick of encouraging growth in the depressed southern countries without ballooning the deficits further through fiscal stimulus. QE, changing bank regulation, devaluation and the other tools being tried in the US and UK are not open to Euro area economies who no longer control their own money, exchange rate or banking system.
It may be that many overborrowed western economies have to rein in spending to get their deficits and debts under control. That is going to require political leaders who can find the words to get people to believe it is the only option, and then offer them the hope that after a short sharp adjustment things can start to get better again. The danger of the current drift in Euroland is we will end up with bigger cuts and less hope.