Pivotal moment for the euro zone

Stock markets in many parts of the world closed higher on semi-positive news from the US labour market yesterday. However, the rise in stock prices over the past few days does not signal the beginning of a recovery at all. I have no doubt that stocks will plummet again in the short run. The downgrades of Italy (Moody's, Fitch) and Spain (Fitch), the dismal situation of several European banks (most prominently, Société Générale and Dexia) as well as the ongoing foot-dragging of the ECB and European politicians all add up to what I consider a pivotal moment in the short history of the euro zone. As Robert J. Shapiro, an adviser to the IMF, and Gerhard Bläske of the German financial newspaper Börsen-Zeitung ("Flächenbrand verhindern", 06/10/2011) recently put it, the euro zone is at the risk of finally breaking apart, if no solution will be found in the nearest future. The AAA rating of France is already being reviewed by many, and it is not impossible that Germany's rating will come under fire, too, when ever more money will be spent on bailing out European banks and sovereigns.

How did we get here? In June, I wrote in the comments to an article that Greece should be allowed to default on its debt in an orderly way or otherwise the can, which politicians and central bankers had already been kicking down the road for much too long at that time, would get heavier by the day. Well, it certainly is heavier now. I understand that the ECB wants to buy time for the government officials to find a way out of their countries' miserable situations by purchasing ever more sovereign bonds. But that's all it is: Buying time. It has been clear from the beginning of the debt crisis that simply pumping money into the markets would not be a solution to the problem. Unfortunately, not much has happened since then. Instead, we had to learn that the stress tests conducted to test the soundness of Europe's banks failed: Dexia performed very well on the test, but in reality it will have to be bailed out now. As a result, France and Belgium will have to provide financial guarantees for tens of billions of euros, which comes with a risk that rating agencies will be taking into account. We will probably know more after the weekend. I am afraid, however, that too much time has gone by and that decisions will have to be made very quickly now, not leaving enough time for a thorough analysis of both the old and new problems Europe is having.