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.

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In your 30s? You missed out on £26,000 and you're not even protesting

The 1980s kids seem resigned to their fate - for now. 

Imagine you’re in your thirties, and you’re renting in a shared house, on roughly the same pay you earned five years ago. Now imagine you have a friend, also in their thirties. This friend owns their own home, gets pay rises every year and has a more generous pension to beat. In fact, they are twice as rich as you. 

When you try to talk about how worried you are about your financial situation, the friend shrugs and says: “I was in that situation too.”

Un-friend, right? But this is, in fact, reality. A study from the Institute for Fiscal Studies found that Brits in their early thirties have a median wealth of £27,000. But ten years ago, a thirty something had £53,000. In other words, that unbearable friend is just someone exactly the same as you, who is now in their forties. 

Not only do Brits born in the early 1980s have half the wealth they would have had if they were born in the 1970s, but they are the first generation to be in this position since World War II.  According to the IFS study, each cohort has got progressively richer. But then, just as the 1980s kids were reaching adulthood, a couple of things happened at once.

House prices raced ahead of wages. Employers made pensions less generous. And, at the crucial point that the 1980s kids were finding their feet in the jobs market, the recession struck. The 1980s kids didn’t manage to buy homes in time to take advantage of low mortgage rates. Instead, they are stuck paying increasing amounts of rent. 

If the wealth distribution between someone in their 30s and someone in their 40s is stark, this is only the starting point in intergenerational inequality. The IFS expects pensioners’ incomes to race ahead of workers in the coming decade. 

So why, given this unprecedented reversal in fortunes, are Brits in their early thirties not marching in the streets? Why are they not burning tyres outside the Treasury while shouting: “Give us out £26k back?” 

The obvious fact that no one is going to be protesting their granny’s good fortune aside, it seems one reason for the 1980s kids’ resignation is they are still in denial. One thirty something wrote to The Staggers that the idea of being able to buy a house had become too abstract to worry about. Instead:

“You just try and get through this month and then worry about next month, which is probably self-defeating, but I think it's quite tough to get in the mindset that you're going to put something by so maybe in 10 years you can buy a shoebox a two-hour train ride from where you actually want to be.”

Another reflected that “people keep saying ‘something will turn up’”.

The Staggers turned to our resident thirty something, Yo Zushi, for his thoughts. He agreed with the IFS analysis that the recession mattered:

"We were spoiled by an artificially inflated balloon of cheap credit and growing up was something you did… later. Then the crash came in 2007-2008, and it became something we couldn’t afford to do. 

I would have got round to becoming comfortably off, I tell myself, had I been given another ten years of amoral capitalist boom to do so. Many of those who were born in the early 1970s drifted along, took a nap and woke up in possession of a house, all mod cons and a decent-paying job. But we slightly younger Gen X-ers followed in their slipstream and somehow fell off the edge. Oh well. "

Will the inertia of the1980s kids last? Perhaps – but Zushi sees in the support for Jeremy Corbyn, a swell of feeling at last. “Our lack of access to the life we were promised in our teens has woken many of us up to why things suck. That’s a good thing. 

“And now we have Corbyn to help sort it all out. That’s not meant sarcastically – I really think he’ll do it.”