He then asks the question of why have the Eurozone policymakers and financial regulators been unable to end the crisis.
The answer is that the Eurozone and the rest of the global financial system are facing a solvency crisis that they have been treating as a liquidity crisis since 2008. Treating the symptom is kicking the can down the road and not curing the cause.
Europe's leaders have spent most of the euro crisis denying there's a euro crisis....
The denialism ended this summer, as the financial bushfire moved to Italy and even began to menace Belgium and France.... If the rhetoric and the not-so-faint snobbery have vanished, to be replaced by panic about "a last wakeup call" and "a crucial crossroads", the actual policy-making is as clueless as ever....
The eurocrats can impose austerity, and bring in Goldman Sachs employees such as Mario Monti to run newly impoverished economies; but anything that might actually break the fire still eludes them.
In the meantime, the crisis has just kept growing.Which is exactly what you would expect given that they are focused on treating the liquidity symptoms and not the underlying solvency cause of the crisis.
In February 2010, Greece needed to raise just €53bn for the entire year; now euro leaders are looking for a trillion euros and counting. Compare and contrast: in his memoirs, Alistair Darling recounts that it took ministers and officials 10 days and one curry-fuelled all-nighter in autumn 2008 to hammer out the complex and costly combination of ready cash, loans and guarantees that saved the British banking system....Actually, they did not save the British banking system. They kicked the can of solvency down the road.
Incidentally, these same policies were adopted by both the US and the Eurozone.
Does anyone really believe that the large British banks are solvent given the fact that their exposure to Eurozone governments and banks vastly exceeds their equity?
A good rule of thumb in this crisis is that when a European state pays more to borrow than an ordinary taxpayer shells out for a bank loan, the government eventually has to call in the rescue brigade.
For much of November, Italy was borrowing at a rate of 7% – and probably the only thing that has kept interest rates from going higher still is that the European Central Bank (ECB) has been buying Rome's IOUs.
In other words, the markets trust the Italian state – with its own tax-raising powers – less than it does a couple in Kettering who'd quite like a new kitchen. Which, given that Italy plans to roll over more than €360bn (£310bn) of debt next year, is hardly sustainable for the new prime minister Mario Monti. Indeed, on 1 February, Rome will have to either repay or renew €28bn of loans. Even now, no one has the faintest idea how it will do that.
Over the next couple of months, Italy's crisis can go one of three ways: either the ECB keeps on buying its bonds, with the blessing of northern-European voters and markets; or ECB head Mario Draghi pledges to fund financially distressed eurozone governments; or Rome gives in and calls for a bail-out. If the last even looks likely, financiers will almost certainly panic that Italy is about to default on its debt. With about a third of the country's bonds held abroad, this could wreak chaos in world markets – including in Britain, which is by far the biggest foreign owner of BTPs. That's the sort of event Barack Obama has in mind when he remarks that Europe's crisis is "scaring the world".The idea that owners of Italy's debt might have to take a haircut is not what scares the world. What scares the world is no-one knows who is holding onto the losses. It is the possibility of contagion pulling down the global financial system that scares the world.
Regular readers know that the way to eliminate the fear of contagion pulling down the global financial system is not more expensive bailouts, but disclosure. Specifically, every bank must be required to provide ultra transparency by disclosing on an on-going basis their current asset, liability and off-balance sheet exposure details.
With this data, everyone knows who is holding the losses. More importantly, market participants can take steps to adjust the amount and price of their exposure so that they do not lose more than they can afford to lose.
As for the banks in any country that sees its sovereign default, what is needed is a backstop to the sovereign's guarantee of the banks' deposits. In Europe, this backstop could be provided by the EFSF or the ESM. The backstop is needed to prevent a run on the banks.
It must be remembered that history has shown that banks with negative book equity can continue to operate and provide loans and payment services.
Rome's not the only government whose finances are in jeopardy; Madrid is in the same boat, while Brussels and Paris have also seen a surge in loan rates.
Less often talked about is that many of Europe's banks, even well-known French names, are unable to borrow unless from the ECB. "You have European banks nowadays claiming they're not European at all because they're worried the very word will scare away investors," says Grant Lewis, head of research at Daiwa Europe. That credit crunch cannot carry on for much longer without causing either a full-scale banking crisis or throttling economic growth.
Not that there's much growth to be had, because the prescription of austerity for sick economies simply makes them sicker. By the IMF's own projections, 2012 will be Greece's fifth straight year in recession, which by now should really be termed a depression...
