by Jerome a Paris
Tue Jul 12th, 2011 at 05:06:49 AM EST
We're quickly (and probably thankfully) moving near the endgame on the EU political crisis, as debt "contagion" reaches both Spain and Italy and will quickly impose that vastly more serious (yes, ironic use of word intended) political action is taken.
The crisis scenario is as follows:
1) Speculative attacks on Italy and Spain build up, eventually cutting them (and their banks) off from capital markets
2) Germany/Northern Europe refuse to provide any meaningful support
3) Spain and/or Italy default and/or reimpose capital movement controls, put in question other basic rules of the EU
4) Banks in Spain and/or Italy and very soon thereafter elsewhere in Europe blow up
5) Germany blames feckless southerners and Spain/Italy blames German self-destructive rigidity/selfishness. Each blames the other for destroying Europe.
6) Nationalists of all countries "unite." Godwin is thrown to the wolves.
7) Europe is in full blown political and institutional crisis (oh, and financial too)
The only place this can be prevented is in line 2 - ie will Northern Europe realize that it's in its own interest not to throw half of Europe under the bus because they righteously think it's the "moral" thing to do? And will they do it in a way that does not impose self-defeating austerity or semi-colonialist constraints on the Southern countries (in which case we're back soon enough to item 3- default or capital controls)?
The universe of outcomes possible today is steadily skrinking - the option of further muddling through seems closed and only the extremes remain, and the positive way out increasingly seems out of reach of our clueless or incompetent - or willfully destructive - political class. It's already obvious that they will act only under the immediate pressure of a full crisis, but it's no longer certain that they'll act before the crisis has caused irreversible damage, or reopened the pandora's box of European national populisms.