The situation in the Eurozone is becoming quite dangerous. Investors are selling the debt of Portugal and Ireland, and Italy and Spain are in danger of being affected. Negotiations for the bailout of Greece are rumbling on, complicated by the unhelpful involvement of Eurozone members in an IMF bailout.
On a kind reading, European leaders are using brinkmanship to apply pressure to the Greek government to commit to stronger fiscal reform before its next big round of bond repayments falls due on 19th May. Eurozone leaders will be meeting on 10th May, which tends to confirm this view. The risk with this strategy is that the markets will not understand it. Rising bond yields could become a self-fulfilling prophecy before European leaders have agreed the Greek package, meaning that Portugal and perhaps others also require bailouts.
On an unkind reading, European leaders have no understanding of how the markets work or the danger that they face. Angela Merkel may be narrowly focused on the electoral cycle. European leaders seem inclined to blame “speculators” for driving up bond yields in the Eurozone periphery, but in reality bond yields are likely moving as slower investors wake up to the problem and quite reasonably sell their holdings. If it is the case that European leaders don’t understand what is going on and would actually be prepared to sacrifice Greece to their own domestic political concerns, this crisis could get a lot worse before it gets better.