Whichever way you cut it, Europe is headed for another bailout.
Previous rescues were about other governments (and principally the German taxpayer) buying new bonds issued by the respective governments of those countries, because no one else would buy them. That was undertaken by the European Financial Stability Facility. This, if they implement their intentions, is about the European Central Bank buying bonds already issued by the Italian or Spanish governments, but it amounts to the same thing – a massive subsidy, funded by Germany. Such is the size of the Italian economy and its debts that support will prove expensive. Italy has roughly the same size economy as the UK, but proportionately twice the national debt – 120 per cent of GDP, say about £1.6 trillion, bigger than Greece, Ireland and Portugal put together. It is a G7 nation. Any official efforts to support Italy have to be seen in that context.
Short term, it ought to prevent the cost of financing for the Spanish or Italian governments spiralling so high that it pushes them into insolvency – debt default. It also marks a decisive step towards the "europeanisation" of various national debts, so all eurozone taxpayers stand behind all eurozone debts. Eventually, new "euro-bonds" could eliminate the speculative raids on nation's bonds because they would no longer exist.
Taken together, the eurozone's finances are probably in better shape than the US's. It may even be that euro-bonds would be relatively safe assets. It is, as George Osborne says, the inexorable logic of the crises of the past 18 months. Markets don't take prisoners any more than they take holidays.Reuse content