Germany holds the key to the euro's future

Angela Merkel is the most powerful and most vulnerable player in the debt crisis.

We have had yet another day of turmoil on the markets and yet another example of "kicking the can" by the eurozone's leaders. This morning, with great reluctance, the European Central Bank (ECB) started to buy Italian and Spanish government bonds to pacify panicked financial markets. It has worked today -- bond yields on Spanish and Italian paper have reduced -- but it won't hold for long.

In the last few days, the likes of Herman Van Rompuy and Economic Commissioner Olli Rehn have taken to the airwaves to state that the markets should not be attacking Italy and Spain. On paper, their credit-worthiness looks reasonably sound: Spain's debt to GDP ratio of 60 per cent is lower than that of Britain, Germany and France, while Italy runs, at 4.6 per cent in 2010, one of the lowest budget deficits in the EU.

But this doesn't matter. The banking sector crisis in Spain may not be finished yet, and the country is suffering from chronic unemployment levels. Italy's debt burden is 115 per cent, second only to Greece. More importantly, the markets know that the 21 per cent haircut on Greece's debt burden is probably just the start of large private sector losses, the price of reckless lending. A significant restructuring of Italian or Spanish debt would bankrupt numerous European banks. In particular, Franco-German banks are exposed to nearly €1 trillion of Spanish and Italian debt.

The bond market won't stabilise until the financial sector is satisfied that eurozone debts, or at least most of them, are underwritten. With Germany the largest and richest country, the responsibility for the eurozone's future lies with them, and with the choices facing the eurozone being expensive and politically toxic, this makes Angela Merkel the most powerful and most vulnerable player in the debt crisis.

Maintaining the current eurozone arrangement can only be achieved by swallowing some very bitter pills. Firstly, the funding capacity of the European Financial Stability Facility (EFSF) would need to be increased from €440bn probably to around €1.5-2 trillion so that it could, if required, underwrite a large chunk of Spanish and Italian debt as well as the smaller EU nations.

Secondly, the euro area countries will have to issue common eurobonds. Eurobonds have suddenly become very popular in the UK -- George Osborne, Ed Balls and Nick Clegg now all think they're essential, even though the Treasury was implacably opposed to them a couple of months ago -- and they enjoy support from most centre-left and some liberal parties across the EU. Merkel's Christian Democrat party and their coalition partners, the neo-liberal Free Democrats, view eurobonds with terror. During negotiations on the EU's economic governance package, government ministers and the European Parliament demanded the establishment of a European debt agency to issue eurobonds. Germany was totally opposed, although the European Commission will submit draft legislation on eurobonds to the Parliament and Council this autumn.

Both measures make economic sense. With bond spreads on 10 year paper at over 6 per cent, Italy is not far away from being unable to fund its debt, while Greece, Ireland and Portugal may need to restructure their debts. Guaranteeing a large chunk of that debt and allowing the EFSF to buy Italian (or indeed other country's) bonds would ease the fears of large sovereign defaults. Moreover, with the markets becalmed, EU leaders could reform the governance of the Eurozone and try to resolve the bank capital crisis that has helped create the government debt crisis.

But the costs of these measures are very high, both economically and politically. Germany has already committed guarantees of €119bn out of the €440bn EFSF. Increasing the EFSF's funding capacity to €1.5 trillion or more would require a contribution of up to €500 billion. If that isn't enough to make the German taxpayer's eyes water, then common eurobonds, even with an AAA credit rating, could still be more expensive than Germany's current bonds. To borrow the language of Yes, Minister's Sir Humphrey Appleby, forcing these measures through the Bundestag would be 'brave'. In other words, it would cost Merkel the next election or lead to the collapse of the coalition.

The other alternative is for the eurozone to divide between, broadly speaking, the north and the south using a "hard" and "soft" euro. The economic consequences would be unknown and, to all intents and purposes, this would end the euro project launched less than twenty years ago by Germany and France.

So Chancellor Merkel has the fate of the euro in her hands and we will soon find out how much Germany is prepared to pay for the euro. Don't expect swift resolution of the crisis because kicking the can down the road for a few more months is theoretically possible, even though it is an increasingly expensive exercise in futility.

Ultimately, saving the euro will be expensive and unpopular, but the costs are known. The price of the euro's demise doesn't bear thinking about.

Ben Fox is chairman of GMB Brussels and political adviser to the Socialist vice-president of economic and monetary affairs.

Steve Garry
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The footie is back. Three weeks in and what have we learned so far?

Barcleys, boots and big names... the Prem is back.

Another season, another reason for making whoopee cushions and giving them to Spurs fans to cheer them up during the long winter afternoons ahead. What have we learned so far?

Big names are vital. Just ask the manager of the Man United shop. The arrival of Schneiderlin and Schweinsteiger has done wonders for the sale of repro tops and they’ve run out of letters. Benedict Cumberbatch, please join Carlisle United. They’re desperate for some extra income.

Beards are still in. The whole Prem is bristling with them, the skinniest, weediest player convinced he’s Andrea Pirlo. Even my young friend and neighbour Ed Miliband has grown a beard, according to his holiday snaps. Sign him.

Boots Not always had my best specs on, but here and abroad I detect a new form of bootee creeping in – slightly higher on the ankle, not heavy-plated as in the old days but very light, probably made from the bums of newborn babies.

Barclays Still driving me mad. Now it’s screaming from the perimeter boards that it’s “Championing the true Spirit of the Game”. What the hell does that mean? Thank God this is its last season as proud sponsor of the Prem.

Pitches Some groundsmen have clearly been on the weeds. How else can you explain the Stoke pitch suddenly having concentric circles, while Southampton and Portsmouth have acquired tartan stripes? Go easy on the mowers, chaps. Footballers find it hard enough to pass in straight lines.

Strips Have you seen the Everton third kit top? Like a cheap market-stall T-shirt, but the colour, my dears, the colour is gorgeous – it’s Thames green. Yes, the very same we painted our front door back in the Seventies. The whole street copied, then le toot middle classes everywhere.

Scott Spedding Which international team do you think he plays for? I switched on the telly to find it was rugby, heard his name and thought, goodo, must be Scotland, come on, Scotland. Turned out to be the England-France game. Hmm, must be a member of that famous Cumbrian family, the Speddings from Mirehouse, where Tennyson imagined King Arthur’s Excalibur coming out the lake. Blow me, Scott Spedding turns out to be a Frenchman. Though he only acquired French citizenship last year, having been born and bred in South Africa. What’s in a name, eh?

Footballers are just so last season. Wayne Rooney and Harry Kane can’t score. The really good ones won’t come here – all we get is the crocks, the elderly, the bench-warmers, yet still we look to them to be our saviour. Oh my God, let’s hope we sign Falcao, he’s a genius, will make all the difference, so prayed all the Man United fans. Hold on: Chelsea fans. I’ve forgotten now where he went. They seek him here, they seek him there, is he alive or on the stairs, who feckin’ cares?

John Stones of Everton – brilliant season so far, now he is a genius, the solution to all of Chelsea’s problems, the heir to John Terry, captain of England for decades. Once he gets out of short trousers and learns to tie his own laces . . .

Managers are the real interest. So refreshing to have three young British managers in the Prem – Alex Neil at Norwich (34), Eddie Howe at Bournemouth (37) and that old hand at Swansea, Garry Monk, (36). Young Master Howe looks like a ball boy. Or a tea boy.

Mourinho is, of course, the main attraction. He has given us the best start to any of his seasons on this planet. Can you ever take your eyes off him? That handsome hooded look, that sarcastic sneer, the imperious hand in the air – and in his hair – all those languages, he’s so clearly brilliant, and yet, like many clever people, often lacking in common sense. How could he come down so heavily on Eva Carneiro, his Chelsea doctor? Just because you’re losing? Yes, José has been the best fun so far – plus Chelsea’s poor start. God, please don’t let him fall out with Abramovich. José, we need you.

Hunter Davies is a journalist, broadcaster and profilic author perhaps best known for writing about the Beatles. He is an ardent Tottenham fan and writes a regular column on football for the New Statesman.

This article first appeared in the 27 August 2015 issue of the New Statesman, Isis and the new barbarism