Euro stands on the brink

The disagreement on Greece harms Italy, stifles Spain and threatens to break up the eurozone

The permanent convulsion of the markets, which barely leaves a week of calm between one episode of attacks on peripheral public debts and the next, is pushing the euro zone into financial chaos and toward the brink of breakup. The crisis, poorly handled by the EU institutions, has taken a dangerous qualitative leap.

The first consequence was that Monday was a dark day for Europe, surely the worst since the creation of the euro, with unbridled speculation against Italy and Spain. The Spanish risk premium attained 336 basis points and the Italian over 300: an unsustainable situation in the short term for Spanish solvency, and above all for that of Italy, whose burden of debt is 120 percent of GDP. In Spain the burgeoning debt interest stifles economic recovery. The punishment of the debt also translates into a stock-market plunge of the banking systems, now the object of a reform that in these circumstances can only be a failure.

The euro is in a tight predicament, the EU authorities being unable to agree on a bailout plan that would stabilize Greek finances during the next three years. With Spain and Italy now in the sights of the speculators, the finance ministers, the ECB and other institutions urgently need to work out an agreement to save the euro (for it is now a question of survival) with a bailout of Greece.

The problem is well known. Greece cannot repay its loans, and needs a new bailout plan including the restructuring of this debt. That is, the creditors of Greece have to contribute to the bailout with a haircut. If this restructuring is to be effective, the risk-premium agencies must accept that this is not a default. A maladroit move by the EU authorities was that of announcing initiatives before agreeing with the agencies that this acceptance of a loss would not be considered a default. The result is an unsustainable risk premium, and growing difficulty in reaching an agreement that would serve to keep down speculation.

The creditors of the European debts bear a responsibility in this critical situation. They react hysterically to minor symptoms, and are disinclined to consider the real economic underpinning of each country. But what investors rate most negatively is the deplorable handling of the crisis. The lack of an economic government empowered to make decisions has sown disorder in EU finances, is invalidating the adjustment programs in certain countries (paid for with social cutbacks, as in Spain), and may lead to the disappearance of the euro.

To correct this chaos, which brings impoverishment and unemployment, the EU leaders have to approve now, not later, the second bailout of Greece, with the acquiescence of the risk-premium agencies - conveying a message that the ECB and the Eurogroup are able to put an end to speculation. The financial system has to know that the ECB will use as backing the bonds of all the EU countries, whatever the level of punishment received. We have seen enough of patchwork solutions.