Brendan Keenan: Closer political union is needed to resolve European debt crisis
Published 14/07/2011 | 05:00
THE crew is still squabbling, with the occasional mutineer making attempts to seize the rudder, but the great ship Euro is beginning to turn. Slowly, of course. Among other difficulties, no one can agree how far ahead is the iceberg. Is there plenty of time to decide on the proper course, or is collision imminent?
The recent rise in bond yields in both Spain and Italy makes disaster look a lot closer. A predictable, but desperately unintended, effect of the apparent change of direction towards debt reduction in Greece is that lenders have begun to do their calculations on the basis that Spanish or Italian loans will not be repaid as promised, never mind those of Ireland and Portugal.
Once the bets are placed, it will be hard to convince them to change their minds. And they could be placed within days. The Italian bond auction today may need support from the ECB to ensure success. Success now is already defined as any interest rate below 6pc. Any rise above 7pc -- giving a real, post-inflation rate of 5pc -- would count as disaster.