The risk of a eurozone breakup is very real. The decision reached among European Union leaders in October, which was supposed to ease the mounting debt crisis, has proved to be too little, too late.
The latest failure has made clear that senior European officials have once again been overcome by developments.
For how much longer can Italy and Spain continue to borrow money at mammoth rates in order to service their debt? Obviously not for much longer. This means that there is not much time left. The existing rescue mechanism, even if it were to be enhanced, will not suffice to sustain Italy — things will become worse if Spain joins the line. The plan to leverage money from the European Financial Stability Facility (EFSF) will simply create a new toxic bomb at the heart of the eurozone.
The vast majority of experts appear to agree that the only way to save the euro is if the European Central Bank comes into play either by issuing eurobonds or by printing more money. But both ideas have met with German resistance. Berlin has counterproposed yet another unclear plan about fiscal unification in the eurozone as well as automatic and draconian sanctions for member states that violate strict new limits on deficit and debt.
Sure, no one denies the fact that member states must tame their debts and deficits. However, as demonstrated by Greece — the bad student as it were — but also by the more industrious Ireland and Portugal, the recipe of internal devaluation is not bringing the desired results.
But even if the uneasy eurozone governments succumb to the whims of Berlin, the problem will not be remedied. First because, as new ECB President Mario Draghi said, the Frankfurt-based institution will not act beyond rules laid down by EU treaties. Second because, given the escalating crisis, the pressure is unlikely to stop at the community?s weaker links.
Everything seems to point to the fact that the markets will continue to test the tolerance limits of member states such as Italy and Spain. Practically, this means that unless Angela Merkel and Nicolas Sarkozy open the path for greater ECB involvement during the coming EU summit, then any plan will be irrelevant and the eurozone crisis will grow deeper.
Things have come to a head. Any further delay will increase the cost of dealing with the crisis. Worse, it increases the likelihood of an unexpected event that would accelerate the end of the euro.