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Eurosis

1 September 2011

3:45 PM

1 September 2011

3:45 PM

Most of Europe takes all of August off for summer. Paris is empty, Brussels eerie and
nobody works in Madrid. But as politicians and officials come back from their holidays, they are finding that the problems of the euro have not gone away. Quite the contrary. No less a supporter
than former EU Commission president Jacques Delors believes that the European currency is still “on the edge
of the precipice”.

It is easy to see why the European grandee feels as he does. The euro eased against the dollar today, taking a cue from lower stocks; the euro was down 0.6 per cent.


The losses came on top of data from the European Commission, which showed economic sentiment inside the Eurozone plunged to 98.3 in August from 103 in July, its weakest level in more than a year. Meanwhile, the Italian bond auction
underwhelmed most investors – Rome sold £6.86 billion of long-term debt, but the bid-to-cover ratio on a new ten-year bond slumped to 1.27, below the 1.4 average for this year. The
result raised fears that sovereign debt contagion may yet claim the Eurozone’s third largest economy.

The problem in Italy has been the deal struck between the ECB and the Italian government, which was intended to see the ECB buy Italian bonds in exchange for a credible programme of deficit
reduction. Initially it looked like Italy’s pledge to bring about the required budgetary balance within two years would do the trick. But the parliamentary debate about the issue has raised
doubts about Italy’s seriousness. A number of elements of the Italian strategy have changed since it was submitted to the ECB. And key measures – like halving the number of MPs and
getting rid of Italy’s provinces – will require time-consuming amendments to the Italian constitution.

The realisation probably led to the lower-than-expected demand at the bond auction and has promoted fears that Italy will no longer be able to issue bonds at an affordable level to finance its
enormous debt burden. Many European politicians must be wishing they were back on the beaches.


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