It was no small irony that the German company Hochtief – incidentally the controlling shareholder in Leighton Holdings – said last night that “persistent massive toll dodging” by Greek motorists might force it to write down the value of its two toll roads in Greece.

At government level, they are striving for a more close-knit fiscal union to keep the euro zone intact. Yet at the citizen level, the thinking is entirely different.

The Germans don’t want to bail out Greece and the Greeks resent austerity plans and a European central authority which keeps rates high to stop inflation in Germany.

This is a gross simplification of the challenges which confront Europe but it serves to illuminate the schism between their people and their leaders across this vast political landscape.

And it seems to be finally dawning on the markets that the solution to the region’s woes will take years not weeks to resolve.

When you think about it – the array of nations involved, the sheer political and economic challenge of unity, the enormity of the debt and the endless possible outcomes to this crisis – a near-term result would seem impossible.

So perplexing is this problem that gross oversimplifications are all we have.

And the leaders topple. The heads of Greece and Italy both departed in the last few days and hopes of resolution were again quickly dashed.

Last night the Italian treasury was forced to pay its highest yield yet to raise five-year money in the bond market – the 6.29 per cent was up almost a full percentage point from the last auction in mid October.

Catch 22. The cost of paying down Italy’s two trillion euro debt just got higher. Same deal elsewhere. Spanish bond yields have also blown out. And like Italy, Spain is too big to bail.

By the way, if anybody is wondering why the euro itself remains so strong, this tends to happen at times of sovereign crisis. It suggests the banks and others are madly repatriating large licks of capital.

Anyway, this rising cost of funding the debt comes at a time when sovereign debts have never been higher and economic indicators are pointing lower – which means the capacity to pay is even more stretched. And this is the conundrum for Europe’s leaders: austerity programs are a risk because they can choke off any chance of recovery.

Again, a Catch 22.


The deleterious effect on financial markets is not just in the index falls but in the volumes. Share trading volume in New York last night was pitiful, the lowest this year.

While policy makers diplomatically, and entirely, ignore the spectre of Euro failure it is clear the prospect of failure is rising. What are the possible outcomes?

Nobody has yet framed anything resembling a decent theory on what might happen. The variables are just too many. Uncharted waters and all that.

It is fair to say however that a collapse or defection would hit economic growth and spurn violent ructions in debt and equity markets. Banks and others would have to take huge hits to their asset bases, massive write-downs could shackle lending and growth for some time.

It is also fair to say that failure might not be catastrophic in the longer term. The rebound in economic fortunes, and indeed improving social and political fortunes in Latin America, followed sovereign debt defaults.

The risk of collapse is likely to steel the will of European leaders, spurred on by their banks, to further fiscal unity. Whether their voters go along for the ride is quite another matter.

Looking at the numbers, Italy has almost 2 trillion euros in outstanding public debt. Some 1.5 trillion euros needs to be refinanced in Greek, Italian, Spanish, Portuguese and Irish debt between now and 2014. If spreads continue to rise, that repayment burden will be impossible.

Economists are forecasting lower growth in coming quarters meaning lower sovereign capacity to retire debt. And the wild card, which is not particularly wild, is another credit crunch. European banks are already tightening their lending criteria, protecting themselves for a fall.

Printing cash

The Big Catch 22: if European governments fear depression, as they did during the financial crisis, they will move to stimulate their economies which would lead to higher debt levels still. Not to mention printing money.

The European Central Bank will need to expand its balance sheet by 2.5 times – roughly what the Fed has done already – to finance this 1.5 trillion euros in debt for the laggards of Europe over the next three years.

With the printing presses switched into overdrive in Europe and the US, the value of paper currencies will remain under pressure, gold should stay in vogue and the spectre of a severe inflationary outbreak looms large.

Which is the lesser of the two evils: austerity and economic misery or the risk of hyperinflation? At least with the latter, Europe and US sovereign debts would be inflated away and the world could put off the business of austerity to a later date.