Political leaders as well as the fiscal and monetary authorities in the Eurozone and its member states remain powerless to prevent the spread of the financial crisis between countries. Since the sovereign debt crisis first emerged in Europe, the main aim of the authorities has been to prevent contagion between the economies of the Eurozone. They have failed. Bailouts and budget cuts have not stopped the crisis from spreading from Portugal, Ireland, Greece and Spain, to former bulwarks of the Eurozone, like France and Italy. Investors simply do not believe that many Eurozone countries have the financial strength and political discipline to get their unsustainable debt burdens under control.
Germany, the economic powerhouse of Europe and seen as a safe-haven from the financial crises, has been hit by debt concerns. Yields on German government bonds rose on a shortage of buyers. Investors have steered clear of the bonds because of a growing belief that the Eurozone and its currency will not survive the crisis in its present form — and whatever the outcome, it will not be good for Germany. Either it will have to agree to the European Central Bank (ECB) buying up the bonds of other governments or the issuing of common European bonds. Both these will damage its credit rating.
For now, German chancellor Angela Merkel has refused to publicly consider either. But at a meeting with the new Italian prime minister, Mario Monti, she and French President Nicolas Sarkozy agreed to push for changes to the necessary treaties to ensure better governance in the Eurozone. The likely trade-off is that Germany will agree to let the ECB do more to help dangerously indebted countries.
But efforts to prop up financially unstable countries will be of little help with the real problem — dangerously weak economic growth in the Eurozone. Healthy economic expansion is the only way struggling Eurozone countries will be able to service their debts in a sustainable way.
