To recap a little, it had become apparent that the bailout of Greece was not enough. There was no procedure in the Eurozone either for a country defaulting within it or leaving it. The Eurozone Group had up until now made all the right noises and the markets trusted them: there was no overall assault on European economies because they were led to believe that there would always be bailouts.
But the bailouts are not popular in Germany and and it was increasingly felt could not become the gift which has to keep on giving. As it became apparent that Greece would default, whether the eurozone liked it or not, the Germans came up with a plan for private sector involvement. That is to say that Angela Merkel would persuade the German electorate to go along with it on the basis that they were not footing the whole of the bill. In this case 'private sector' means largely French, German and Greek banks. I should say now that if there is not private sector involvement, this would be tantamount to saying that the banks can take whatever risks they like and be bailed out of their misjudgements, a view which became quite unpopular a couple of years ago. However if the private sector has to take a haircut, they will have to be bailed out by their governments anyway. Many people, for example the Germans and the peripheral countries whose banks have not lent to Greece, might prefer this: better to bail out your own banks than the lazy, corrupt Greek people.
The French rather baulked at all this (it would make their banking sector look insolvent) and produced a plan which involved Greece purchasing some collateral which would cover the banks for part of their exposure. Governments would lend Greece the money to buy the collateral for the banks. Standard & Poor's, the credit ratings agency, said that this would effectively constitute a default, and the Germans said that if there was going to be a default anyway they might as well go back to the German plan after all.
Doubtless you will have worked out what is going on here: nothing. Last night the Eurozone Finance ministers issued a statement which announced nothing. An admission that they couldn't agree. With the euro, one must always look at the political element, for the euro is largely a political tool. They just can't face the idea of a Greek default, because it would be a stain on the record of their political construct. They have just shut their eyes and are hoping it will all go away.
Now the markets are fed up with this dithering. they had been led to believe (dishonestly, in my opinion, but they should have worked it out for themselves) that any difficulty and the Germans would get the chequebook out.
And they have belatedly started to wonder what would happen if other economies got into difficulty, which is why there is talk of of the contagion spreading. In the past week or so Italy's interest rate has gone up by 1%, as has Spain's.
Italy and Spain are two different cases. Spain thought of itself as modern economy, but when it joined the euro its interest rates fell dramatically. this caused a property boom, financed by the banks. this bubble burst, as bubbles do, and the banks are in trouble. Thee is also a serious government deficit.
Italy is larger than Spain but not really a modern economy. It borrowed heavily in the '70s, '80s and '90s and frittered away the money. There is very little to show for it. They ought to have made (and ought now to be making) dramatic cuts in public expenditure, but there is no political will for it (and damn all in the way of leadership). The alternative is to improve the growth rate, but this would require making it easier and cheaper to fire people, reducing the stifling regulatory burden on business and reducing the nominal tax burden by actually collecting more of what is due. There is no political will for this either.
I don't think Italy will go bust, but it will be caught up in the maelstrom which has been caused by dishonesty on the part of the European political élite, political chicanery and dithering.
God help us all.
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