The market has realised that Ireland is no more capable than Greece of paying its debts, and that the Germans are not going to pay them either. That is the fundamental problem that faces the Eurozone at present. There is also a real question over whether Portugal is going to be able to pay its debts. And, in time, Spain, Italy, Belgium and others may start to face the same question.
I am finding it hard to see what could stop this present round of contagion.
- The Germans could backtrack and agree to stand behind the debts of the periphery. But I suspect that the German government faces a hard political constraint: the German people won’t wear it.
- The ECB could stand behind the debts of the periphery. This is very unlikely at present. There are enough hawks on the council to prevent a serious bond-buying programme. They are still talking about exiting from extraordinary support measures.
- The European bailout fund could be increased in size. But that would require a degree of German backtracking, which is unlikely, and the bailout fund would still have major weaknesses — in particular, that it loses firepower every time a guarantor becomes one of the nations supported by the fund.