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Source: Photos.com
Investors fretting about potential contagion among the euro
zone's debt-laden member countries are refusing to be placated by
Ireland's decision to finally seek a bailout.
International markets spent all of one session breathing a sigh of
relief and rallying on the news the Irish domino appeared to have
been stabilised.
The very next day, the exact opposite occurred and markets plunged
in equal measure.
Today, while Wall Street was closed for Thanksgiving and European
markets still managed to eek out gains, debt markets have been
continuing to reflect those persistent fears of contagion.
This despite Ireland's bailout acceptance, and its austerity plan
for tax hikes and deep spending cuts.
It appears the debate has now turned to whether the 16-member euro
zone itself is headed for Armageddon.
Brad Gordon, from Macquarie Private Wealth, speaking on NZI
Business this week, says the problem with the euro zone is "you've
got one monetary policy and 16 fiscal or government policies and
it's clearly not working".
But Klaus Regling, the chief of the European Financial Stability
Facility - essentially the bailout fund - rubbished the idea that
the euro zone could fail.
"There is zero danger. It is inconceivable that the euro fails," he
said.
Is it inconceivable? OM Financial's Kevin O'Sullivan argued on our
programme today that, no, it's not.
"A year or so ago it was inconceivable that the US housing market
could fail and that Lehman Brothers could fail, all these things
that were too big to fail, history has proven that is just not the
case," he said.
Economic suicide?
Regling does make the point though that choosing to leave the euro
zone for weaker countries would be "economic suicide, likewise for
stronger countries".
Perhaps, but even if the euro zone can afford to continue bailing
out its weaker members, the longer it goes on, the more politically
messy it becomes.
The disparity between the likes of Europe's most prosperous
economy, Germany, and the countries who required bailouts is
stark.
How long will citizens of countries with solvent governments
tolerate the massive loans they have been forced to extend to their
neighbours?
And, just as irksome for the recipients, you could over time - as
Gordon points out - "get the creep of stronger nations imposing
themselves over weaker nations".
I wonder whether Spain could well prove the tipping point.
Unlike the relatively small euro zone economies of Greece, Ireland
and Portugal, Spain is the fourth-largest of the 16-member
group.
If Spain - the 'S' in the debt-laden PIGS - were to go the trough
for a bailout, the already beaten-down euro would come under
intense pressure.
The European Central Bank, which decides monetary policy for the
euro zone, holds its policy meeting next week.
It's unlikely to meddle with its interest rate lever for fear of
really spooking the markets, but that meeting is likely to be one
of its most closely watched yet.
