David Prosser: Merkel closes eyes to the disaster that is unfolding before her


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Outlook Loose talk costs lives. Broadly, that is how one would sum up the contents of the interview which was given by Angela Merkel to German radio yesterday. Unfortunately, denial remains the most appropriate word for the Chancellor's ongoing approach to the eurozone crisis. The capital markets now put the chances of a Greek sovereign debt default at 98 per cent, yet Ms Merkel yesterday chose not to address that fear.

Instead she rebuked those members of her own government who have had the nerve to talk openly about how to handle a Greek default in recent days. If no one talks about it, she seems to think, it will not happen.

It would be funny if it were not so deadly serious. For every day that the possibility of a Greek default is not properly addressed is another day in which the financial markets fill the vacuum for themselves: by dreaming unpleasant dreams about the effect of a default on France's banks, for example, or by making Italy pay through the nose to get its latest bond auction away.

The really dumb thing about pretending everything is going to turn out fine in Greece is that if planned for, a default need not be catastrophic. Indeed, it's easy to forget that there has already been such an event – the second bail-out plan agreed for Greece at the end of July involved rewriting the terms of the loans made to the country in a way that was a default in all but name.

Hence the calls by Christine Lagarde, the new head of the International Monetary Fund – who, as France's finance minister until the spring, presumably knows a thing or two about the state of her country's financial institutions – for a round of capital raising by eurozone banks. Hence the flying visit to the EU finance ministers meeting this Friday from a worried US Treasury Secretary. Hence the urgent need to ratify (or even to enhance) July's agreement, which included a blueprint for how the European Financial Stability Fund might rescue crisis-ridden eurozone members like Greece.

Ms Merkel's reluctance to accept that the eurozone crisis is about to reach boiling point no doubt reflects the difficult domestic political position in which she finds herself. So many of the possible strategies for dealing with these matters are bitterly opposed by her political opponents in Germany, not to mention members of her own coalition government.

Still, the Chancellor consistently repeats her mantra that if the euro fails, so will Europe. If her unshakeable faith in the single currency project is to be believed, she will, in the end, have to confront these issues – and her foes. Is she waiting until the eurozone is on the brink of outright collapse, in the hope that such disaster will enable her to carry the argument? If so, the rollercoaster ride is going to get even more nausea-inducing.