A SYSTEM is only as strong as its weakest point. Reinforcing one link in the chain exposes the vulnerability of the next. The euro zone is now so fragile in so many places that if the single currency is not to break apart, Europe must set about redesigning the system as a whole. The European summit on June 28th and 29th is a test of whether the euro zone’s leaders will be capable of that (see Charlemagne). Even though some of the wiser ones are now hatching plans for a banking union and for intervening directly in government-debt markets, the evidence so far is that the task is still, alas, beyond them.
The futility of treating the euro crisis as a series of separate national emergencies was plain for the world to see this week—first in Greece, then in Spain, and finally at the G20. On June 17th Greek voters chose parties that say they will broadly stick by the bail-out agreement (see article). The new government, a coalition of the three parties, headed by Antonis Samaras of New Democracy, vowed that Greece’s place in Europe would “not be put in doubt”.
It was a rare victory for the euro, but investors’ relief lasted only a few hours. That was partly because Greece has so many more weaknesses to overcome. To accomplish anything at all, Mr Samaras will have to put aside a lifetime of rivalry and rise above the politics of patronage. He must persuade ordinary Greeks, battered by austerity, to accept cuts to the minimum wage, pensions and spending, as well as a programme of structural reform that has no parallel in modern Greek history. If he fails, Greece will not qualify for further tranches of rescue money. Even if Greece’s official creditors give some leeway, by slightly lowering interest rates or rescheduling debt payments, the threat will remain that Greece will have to leave the euro.
Greece, thus, is trapped. As long as the country is in danger of leaving the euro, growth will continue to shrink, bail-out targets will be missed and politics will drift to extremes. But as long as Greece lacks growth, misses targets and fails in its politics, it will be in danger of leaving the euro.
Spain is now in a similar bind. Earlier this month it secured a pledge of up to €100 billion ($127 billion) from the euro zone to shore up its banks. But this did nothing to restore confidence. Bad loans in Spain are at an 18-year high: as The Economist went to press, rumours swirled that the latest assessment of the banks’ dodgy assets would be well above €100 billion. And the bill for shoring up the banks is supposed to be paid by the Spanish government, which may not be able to afford it. On June 19th Spain sold 12-month bills with a coupon of over 5%, more than two percentage points higher than a month ago (and, again, not sustainable).
To solve this problem, another fix is proposed.
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