Eurozone crisis: what have we learned?
People will be debating the lessons of the eurozone crisis for years to come. There's been plenty of that kind of analysis on these pages. But today I thought a shorter time horizon might be in order. Specifically, what have we learned about this crisis in the past few days?
First, we've learned that there isn't going to be a 'soft restructuring' of Greek debt any time soon - probably ever. It will be 'hard' or it will not happen at all.
European officials have been toying with this kind of 're-profiling' idea for several weeks (I discussed it first here on 9 May). This has always seemed a long shot. As I said, if there were an easy way to make investors share the burden of bail-outs without triggering a market panic, you'd think they'd have found it before now.
It turns out, surprise surprise, there isn't one. As Fitch confirmed in its latest downgrade of Greek sovereign debt on Friday, any restructuring of Greek debt - even if it didn't affect the principal - would, in their view, trigger a credit event, and a 'default' rating from the likes of Fitch.
And, lest we were in any doubt, it turns our that such an event would also prompt the European Central Bank (ECB) to stop accepting Greek sovereign debt as collateral for ECB loans to Greek banks. Both the new Bundesbank President J Weidmann and the German member on the ECB board, Jurgen Stark, made that clear last week - apparently with the full support of the ECB President Jean-Claude Trichet.
That's the second piece of news from the past week. As Wolfgang Munchau puts it in his latest FT column - we knew the ECB was against debt restructurings, but we didn't know how strongly it felt about it.
We have also learned that Italy is not immune to the troubles afflicting her 'Club Med' partners, though the 'negative' watch for Italian sovereign debt from Standard & Poor's (S&P) over the weekend looks more like a warning shot than the start of any downward spiral.
Italy is blighted by poor growth prospects. Economists reckon it's potential growth rate might be only 1% a year, which is too slow to make a serious dent in its debt burden. And, of course, its stock of debt coming into this crisis was higher than anyone else's. S&P is probably also right to point out that 'political gridlock' and general reform fatigue pose a threat to the country's plans for stabilising their debt by 2013.
But, Italy has other points in its favour, including its recent record of doing the right thing. Ever since joining the euro - indeed, since the early 1990s - Italy's technocrats have consistently got the better of its politicians, and the country's dysfunctional politics have not stood in the way of fairly impressive budget cuts when such cuts were necessary.
Structural reforms have lagged behind, but when push comes to shove, they have kept a handle on the public finances. In fact, Italy has seen the smallest collateral damage to its budget from this crisis than any country in the eurozone. Its deficit peaked at 5.4% in 2009 and has since been coming down.
Italy's other great advantage is that it is, simply, too big to save. As the chart shows, it accounts for an astonishing 23% of all eurozone government debt (as this handy chart reminds us). For reference, Greece, Portugal and Ireland between them account for less than 8%. In that sense, Italy is a little like the US - its sheer size gives it more wiggle room and raises the bar for failure.
More important to economists is the fact that Italy has much higher levels of private saving than the bail-out countries, and relatively low levels of private debt. And unlike Germany and France, Italy's banks did not spend the past few years buying Greek, Spanish and Portuguese debt. Italy may well have a financial crisis in its future, but I think it's staying in the future. It hasn't been brought closer by the events of the past few weeks.
The bad results for the ruling Socialist party in the Spanish local elections are no surprise: the 'news' would have been if the Socialists had held their ground. But it's a reminder that the 'known unknowns' in the Spanish case are mainly local.
If Spain tips into crisis in the next few months, the odds are that it will be because of something nasty happening to balance sheets at the local level which shocks the markets - in Donald Rumsfeld's phrase, that is the 'known unknown' that makes everyone nervous.
Finally, and perhaps most important, we've learned that eurozone leaders have still not learned to speak with one voice. Whether it's about Greece, 'soft restructuring', or the chances of Ireland extracting softer terms for its emergency borrowing, Europe has been producing its usual cacophony of voices in the past few days, none of them saying quite the same thing.
As ever, the eurozone could do itself a huge favour by simply learning to speak with one voice.