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It's back. After a four-month respite in which equity markets rallied strongly and interest rates on bonds fell, the eurozone's debt crisis is on again. Those who said the European Central Bank was merely putting a large piece of sticking plaster on monetary union's open wound with its cheap credit policy have been proved right.
Since the troubled period began at the end of 2009, there has been a clear pattern to events: crisis, response, respite, new crisis.
The latest recovery has been robust, but it was always a fantasy to believe that the ECB could solve all the euro's problems with its long-term refinancing operations, ladling out ultra-cheap three-year money to European banks.
The current flare-up has three dimensions. The contingent cause of Spanish bond yields heading back into the danger zone (yields on 10-year debt were touching 6% on Tuesday night) was poor demand for bonds in last week's bond auctions.
Fears of contagion and growing opposition to Mario Monti's labour market reforms explain why the Italian stock market has been taking such a thumping, with the shares of badly hit banks suspended.
A second factor is the emergence of political risk. Greece is holding an election early next month, and support has slumped for the two major parties that backed austerity in order to secure a second bailout from the European Union, the ECB and the International Monetary Fund earlier this year. The chances of the Greek public electing a government that repudiates the terms of the bailout is deemed to be high.
Analysts are also worrying about the outcome of the French presidential election, since the polls show that the socialist candidate François Hollande, who wants to rewrite the eurozone's painstakingly negotiated fiscal pact, has a good chance of defeating Nicolas Sarkozy in a run-off.
Markets look at France, Italy, Spain, Portugal and Greece and see the potential for general strikes and civil strife as opposition to austerity hardens. It is not an outlook that inspires much confidence, so at the very best European markets face another two months of turbulence and uncertainty.
The likelihood, however, is that the crisis will go on for much longer. That's because the problems that have resurfaced over the past week have a deeper, structural cause: the flaw in the single currency that has left the weaker countries of the southern fringe deeply uncompetitive in relation to the powerful nations at the core.
The traditional remedy – devaluation – is ruled out by membership of the euro, so the affected countries have no choice but to go for "internal devaluations", which means making themselves more competitive by driving down wages, pensions and public spending.
These programmes are draconian and deeply unpopular. In Rome and Athens, technocratic governments have no mandate for them. To make matters worse, austerity is driving Europe ever deeper into recession, making it harder to get to grips with sovereign debt. It is a toxic, and highly dangerous, mix.
Eurozone crisis is back and here to stay | Business | The Guardian
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