Sorry, there is no euro break-up plan – yet

Reports of plans for a break-up of the euro are premature

Very quickly, I have grave reservations about the Reuters story claiming that top German and French officials have had "intense consultations" on plans to reshape or "prune" the currency bloc, reducing it to a manageable core.

The Brussels press corps do not believe it. Nobody seems to know which German official is briefing behind the scenes that "you’ll still call it the euro, but there will be fewer countries."

The claims do not remotely reflect the stated position of Chancellor Merkel and President Nicolas Sarkozy. Merkozy might like to see Greece tossed to the wolves. That is a different matter.

There is a drive for a core Europe or "Avant-Garde" that pushes ahead with closer union, but that is mostly directed against the UK and other members of the awkward squad. Reuters seem to have conflated two separate issues.

The reality is that EU leaders are still unwilling to contemplate an orderly break-up of monetary union, or to deploy the system’s dwindling reserve of credibility to prepare for this traumatic moment.

To the extent that the Reuters story catches one vein of thought in EU capitals, it is about forcing weak states to leave EMU. This is the worst possible outcome. It can only set off a chain reaction, ultimately engulfing France. At that point the whole eurozone would spiral into a catastrophic depression – if it is not already. Germany itself would be ruined.

My own proposal – like that of Hans-Olaf Henkel, the former head of Germany’s BDI industry confederation – has long been for a radically different kind of break-up. Germany and its satellites should leave, bequeathing the euro, the ECB and other EMU institutions to a Latin union led by France. The euro debt contracts of the south would remain intact. (It is crucial that France stays in the southern bloc, otherwise the instant devaluation of the south would be too great, and France’s banks would blow up on Italian debt)

If conducted skilfully, the revalued Teutonic Thaler could be held by exchange and capital controls at a 30pc premium for long enough to stabilise the two systems. Ultimately each side would get what it wants: Germany could enjoy the stronger currency it needs; the south would restore labour competitiveness without having to go through a decade of grinding deflationary slump. This itself would reduce the risk of defaults. I suspect that within five years, the Latin half would prove to be the more dynamic bloc.

Obviously Germany, Holland etc would have to recapitalise banks to absorb the shock of 30pc FX losses on their Club Med bonds. The banking system might have to be nationalised. So what? This would be much cheaper than the trillions now needed to prop up EMU’s rotten edifice. It addresses the core problem of north-south currency misalignment within EMU that lies behind the whole crisis. Unfortunately, neither Berlin nor Paris seem ready to think along these lines. It would require a complete purge of the political elites in both countries.

Given this strategic fact – and given the risk that Europe will take us all hurtling into disaster – the authorities must instead step up to the plate and deploy the ECB as a lender of last resort to halt the debt spiral. (Yes, the ECB may be incapable of playing this role, since it has no sovereign indemnity. That is a risk. All possible outcomes are by now fraught with danger.)

This must be backed by a broader switch away from 1930s Laval-Bruning liquidationist and contraction policies. There is no justification for allowing real M1 deposits to contract across most of the eurozone – and to plunge in the south – as has occurred over recent months. For a monetarist central bank, the ECB is remarkably insouciant about money.

The EU must slow the pace of fiscal contraction and launch a monetary blitz to lift the south out of chronic depression. A 5pc nominal GDP growth target for euroland for as long as it takes would do the trick. I believe central banks have the capability to deliver such result.

Let me be clear, this is not my preference. It would better for greater Germany to leave EMU. But given the evidence so far that Germania has no intention of taking such a course, it must instead drop its opposition to the sort of radical reflation stimulus so obviously needed to save monetary union and avoid a savage slump.

What Germany cannot continue to do is to refuse to leave EMU, and refuse to reflate. This is not a policy. The rest of the world is entirely entitled to make its irritation known.

Italy, Europe, and Red Brigade terror

Matters are turning serious.

Italy’s labour minister Maurizio Sacconi has just warned that a rushed shake-up of the labour market – as demanded by the EU – risks setting off a fresh cycle of terrorism in the country.

Here is the story from Il Sole.

“We must stop creating tension over labour reform which could lead to a new wave of attacks. I am not afraid for myself because I have (armed) protection. I am afraid for the people who are not protected and could become a target of political violence that is not extinct in our country,” he said.

This is not exaggeration. The Red Brigades-PCC assassinated Massimo D’Antonna in 1999 and Professor Marco Biagio in 2002 for spear-heading labour reforms.

Opposition leader Pier Luigi Bersani praised Mr Sacconi for speaking out at last. “We are in deep trouble. If we ignite the powder-keg of social discord instead of cohesion we will do dramatic damage to the country.”

The EU has woven itself into this drama by presenting Italy with an ultimatum last week, giving the country barely 48 hours to commit to very specific and radical reforms. It is in effect taking sides in an intensely polarized debate within Italy. It is intruding in the most sensitive matters of how society organizes itself, in effect demanding ideological changes – in this case in favour of employers, and against unions – as a condition for further action to shore up Italy’s bond markets.

"We have three deaths in front of us: democracy, politics, and the Left," said Fausto Bertinotti, the elder statesman of Rifondazione Communista and one of Italy's great post-war figures.

"We are living in a neo-Bonapartist financial system. Not a single decision has been taken by the Italian parliament since the end of August except those imposed by the foreign power that now us under administration."

The two bones of contention are Article 18 protecting workers from being sacked for economic reasons, and “firm level agreements” that undercut the power of trade unions to craft deals across sectors.

Those of us in Anglo-Saxon cultures may find it remarkable that Italy still has laws that make it extremely hard for companies to lay off workers when needed. It is clearly a reason why the country has struggled to adapt to the challenge of China, rising Asia, and Eastern Europe.

But that is not the point.

Are such changes to be decided by Italy’s elected parliament by proper process, or be pushed through by foreign dictate when the country is on its knees? “Political ownership” is of critical importance. The EU is crossing lines everywhere, forgetting that it remains no more than a treaty organization of sovereign states. Democratic accountability is breaking down.

This is dangerous. It is only a question of time before the EU itself becomes the target of terrorist attacks in a string of countries, and then what? Will the Project start to demand coercive powers? Will it acquire them?

Eurosceptics have been vindicated. They warned from the start that EMU was a dysfunctional under-taking and that in order to stop it leading to calamitous failure, there would have to be ever deeper intrusions into the affairs of each state and society.

This is now happening at a galloping pace. We really will end up an authoritarian supra-national octopus if this goes on much longer.

Europe’s Punishment Union

Herman Van Rompuy at the end of the summit (Photo: EPA)

Very quickly, there has been much loose talk about EU fiscal union. What was agreed at 4AM this morning is nothing of the sort.

It is a "Stability Union", as Angel Merkel stated in her Bundestag speech. Chalk and cheese.

"Deeper economic integration" is for one purpose only, to "police" budgets and punish sinners.

It is about "rigorous surveillance" (point 24 of the statement) and "discipline" (25), laws enforcing "balanced budgets" (26), and prior vetting of budgets by EU police before elected parliaments have voted (26).

This certainly makes sense if you want to run a half-baked currency union. As the statement says, EMU’s leaders have learned the lesson of a decade of self-delusion. "Today no government can afford to underestimate the possible impact of public debts or housing bubbles in another eurozone country on its own economy."

But none of this is fiscal union. There is no joint bond issuance, no move to an EU treasury, no joint budgets with shared taxation and spending, no debt pooling, and no system of permanent fiscal transfers. Nor can there be without breaching a specific prohibition by Germany's top court, a prohibition that could be overcome only by changing the Grundgesetz and holding a referendum.

(Yes, you could argue that leveraging the EFSF bail-out fund to €1 trillion with "first loss" insurance of Club Med debt implies a massive German-Dutch-Austrian-Finnish-Estonian-Slovak transfer one day to the South. But again, is that really a fiscal union? Mrs Merkel says this money will never be needed because the mere pledge will restore market confidence.)

As Sir John Major wrote this morning in the FT, this does not solve EMU’s fundamental problem, which is the 30pc gap in competitiveness between North and South, and Germany’s colossal intra-EMU trade surplus at the expense of Club Med deficit states.

It is therefore unlikely to succeed. It means that Italy, Spain, Portugal, et al must close the gap with Germany by austerity alone, risking a Fisherite debt deflation spiral. As I have written many times, this is a destructive and intellectually incoherent policy, akin to the 1930s Gold Standard. It risks conjuring the very demons that Mrs Merkel warns against.

Sir John is less categorical, but the message is the same. Europe will have to evolve into a fiscal union to make the system work, but that would be inherently undemocratic without a genuine European government, parliament, and civic union. Such a supra-national union cannot enjoy democratic vitality because there is no European demos, or shared view of the world, or indeed any popular support for such a revolutionary step. Such a union would castrate historic national parliaments, to the advantage of whom?

So this "solution" leads ineluctably to an authoritarian regime. Bad situation.

The alternative is to break monetary union into viable parts, preferably with the withdrawal of greater Germania from the euro. This is off the table.

So, EMU break-up is Verboten, fiscal union is Verboten, full mobilization of the ECB – either to lift the South off the reefs through reflation, or to back-stop the system as a lender-of-last resort – is Verboten. Germany will have none of it.

Instead we have the summit conclusions – EUCO 116/11 of October 27 2011 – and a great deal of coercion.

Please tell me what exactly has been solved.

NEIN, NEIN, NEIN, and the death of EU Fiscal Union

Angela Merkel with Eastern European leaders today (Photo: AP)

Judging by the commentary, there has been a colossal misunderstanding around the world of what has just has happened in Germany. The significance of yesterday’s vote by the Bundestag to make the EU’s €440bn rescue fund (EFSF) more flexible is not that the outcome was a "Yes".

This assent was a foregone conclusion, given the backing of the opposition Social Democrats and Greens. In any case, the vote merely ratifies the EU deal reached more than two months ago – itself too little, too late, rendered largely worthless by very fast-moving events.

The significance is entirely the opposite. The furious debate over the erosion of German fiscal sovereignty and democracy – as well as the escalating costs of the EU rescue machinery – has made it absolutely clear that the Bundestag will not prop up the ruins of monetary union for much longer.

Horst Seehofer, the leader of Bavaria’s Social Christians, said his party would go "this far, and no further".

There can be no question of beefing up the EFSF to €2 trillion or any other sum, whether by leverage or other forms of structured trickery. "The financial markets are beginning to ask whether Germans can afford all this help. We must not risk the creditworthiness of the German state," he said.

The best-read story in today’s Handelsblatt is the mounting rebellion against the EFSF in the Bundesrat, the German senate representing the interests of the regions. While this chamber does not have the power to block budget deals, it has begun to express deep alarm about the drift of events.

Marcel Huber, Bavaria’s Staatskanzleichef, gave an explicit warning that the Free State of Bavaria will not take one step further towards an EMU fiscal union or debt pool.

“A collectivisation of debts will under no circumstances be accepted. We oppose credit lines for the EFSF or leveraging through the ECB. Our message is simple and clear.”

Since the existing EFSF is too small to make any material difference to the EMU debt crisis, this means that nothing has in fact been resolved. We are where we started, almost entirely reliant on the ECB to play the role of lender-of-last resort.

Can it realistically play this role after the double resignation of Axel Weber at the Bundesbank and Jurgen Stark at the ECB itself over bond purchases? Can it defy Europe’s paymaster state for long? You decide.

This great eruption of feeling in Germany has been the transforming political and strategic fact of Europe over the summer. Finance Minister Wolfgang Schäuble is no doubt scrambling around trying to find some formula to breach his pledge that there is no secret plan to leverage the EFSF into the stratosphere.

He will try to pretend that this is not a flagrant double-cross. But his scheming with the French is largely irrelevant at this point. Bigger events are rolling over him. If he really thinks he can dupe the Bundestag yet again, he is out of his mind. And will soon be out of office.

As Bundestag president Norbert Lammert said yesterday, lawmakers had a nasty feeling that they had been "bounced" into backing far-reaching demands. This can never be allowed to happen again. He warned too that Germany's legislature would not give up its fiscal sovereignty to any EU body.

In a sense, the Bundestag vote was much like the ruling by the Constitutional Court earlier this month. It too said "Yes" to the bail-out machinery, but that was not relevant fact. What mattered was the Court’s implicit warning that Germany had reached the outer boundaries of EU integration, that German democracy is under threat, and its explicit warning that the Bundestag’s fiscal powers could not be alienated to Brussels.

Something profound has changed. Germans have begun to sense that the preservation of their own democracy and rule of law is in conflict with demands from Europe. They must choose one or the other.

Yet Europe and the world are so used to German self-abnegation for the EU Project – so used to the teleological destiny of ever-closer Union – that they cannot seem to grasp the fact. It reminds me of 1989 and the establishment failure to understand the Soviet game was up.

Our own Chancellor George Osborne has fallen into this trap. I can entirely understand why he is calling for quick moves towards EMU fiscal union, but such an outcome is not on the table.

Repeat after me:

THERE WILL BE NO FISCAL UNION.

THERE WILL BE NO EUROBONDS.

THERE WILL BE NO DEBT POOL.

THERE WILL BE NO EU TREASURY.

THERE WILL BE NO FISCAL TRANSFERS IN PERPETUITY.

THERE WILL BE A STABILITY UNION – OR NO MONETARY UNION.

Get used to it. This is the political reality of Europe, since nothing of importance can be done without Germany. All else is wishful thinking, clutching at straws, and evasion. If this means the euro will shed some members or blow apart – as it almost certainly does – then the rest of the world must prepare for the day.

It has certainly been an electrifying few weeks.

I happened to be in the room with a group of Nobel economists in Lindau last month when German President Christian Wulff lashed out at Europe, accusing the ECB of violating its mandate and subverting the Lisbon Treaty.

“I regard the huge buy-up of bonds of individual states by the ECB as legally and politically questionable. Article 123 of the Treaty on the EU’s workings prohibits the ECB from directly purchasing debt instruments, in order to safeguard the central bank’s independence,” he said.

“This prohibition only makes sense if those responsible do not get around it by making substantial purchases on the secondary market,” he said.

Mr Wulff said Germany itself risks being engulfed by escalating debts. Who will “rescue the rescuers?” as the dominoes keep falling, he asked.

"Solidarity is the core of the European Idea, but it is a misunderstanding to measure solidarity in terms of willingness to act as guarantor or to incur shared debts.

"With whom would you be willing to take out a joint loan, or stand as guarantor? For your own children? Hopefully yes. For more distant relations it gets a bit more difficult."

More distant relations?

“All I heard was Germany, Germany, Germany. There was nothing about Europe. It was astonishing,” said Myron Scholes, the winner of the 1997 Nobel Prize.

Indeed it was. Fellow laureate Joe Stiglitz said that if President Wulff’s views reflected the outlook of the German government, monetary union would have collapsed already.

Well yes. Quite.

The dangerous subversion of Germany democracy

The Bundestag and the German people are being undermined (Photo: Alamy)

Optimism over Europe’s "grand plan" to shore up EMU was widely said to be the cause of yesterday’s torrid rally on global markets, lifting the CAC, DAX, Dow, crude and copper altogether.

This is interesting, since Germany’s finance minister Wolfgang Schäuble has given an iron-clad assurance to the Bundestag that no such plan exists and that Germany will not support any attempt to "leverage" the EU’s €440bn bail-out plan to €2 trillion, or any other sum.

"I don’t understand how anyone in the European Commission can have such a stupid idea. The result would be to endanger the AAA sovereign debt ratings of other member states. It makes no sense."

All of this was out in the open and widely reported. Markets appear to be acting on the firm belief that he is lying to lawmakers, that there is indeed a secret plan, that it will be implemented once the inconvenience of the Bundestag’s vote on the EFSF tomorrow is safely out of the way, and that German democracy is being cynically subverted.

The markets may or may not right about this. Mr Schäuble has a habit of promising one thing in Brussels and stating another in Berlin.

But it is surely an unhealthy state of affairs. One of the happiest achievements of the post-War era is the emergence of a free, flourishing, and democratic Germany under the rule of law.

Carsten Schneider, finance spokesman for the Social Democrats, spoke for many last week, denouncing the shabby back-room dealings as a scandal. "A new multi-trillion programme is being cooked up in Washington and Brussels, while the wool is being pulled over the eyes of Bundestag and German public. This is unacceptable."

Indeed it is.

Mr Schäuble has now been forced to give a categorical assurance that the EFSF will not be expanded. He cannot break his word without very serious consequences, or before the financial crisis turns deadly.

We have reached the point where the unseemly scramble to find ever more inventive and extreme ways to save monetary union – yet without coming clean, and invariably by trying to deceive German citizens about the real implications of each deal – is clashing directly with the integrity of German democracy.

Andreas Vosskuhle, head of the constitutional court or Verfassungsgericht, specifically warned this week that Germany is entering treacherous waters.

He said that the improvisation of far-reaching policies to shore up EMU had become "dangerous", and warned against schemes to circumvent the rule of law with backroom deals. "Germany has a great affinity for the rule of law. People expect the political class to obey the rules."

"There is little leeway left for giving up core powers to the EU. If one wants to go beyond this limit – which might be politically legitimate and desirable – then Germany must give itself a new constitution. A referendum would be necessary. This cannot be done without the people," he told the Frankfurter Allgemeine.

Dr Vosskuhle reminded politicians that they do not have the legal authority to sign away German constitutional prerogatives.

"The sovereignty of the German state is inviolate and anchored in perpetuity by basic law. It may not be abandoned by the legislature (even with its powers to amend the constitution)," he said.

He repeated that the Court had set clear boundaries to EU bail-outs in a ruling earlier this month. "Our judgment makes clear that the Bundestag cannot abdicate its fiscal responsibilities to other actors. And no permanent mechanism may be created that entails taking over the liabilities of other states," he said.

Otmar Issing, the ECB’s founding guru, has gone even further in recent weeks, warning that the current course must ultimately provoke the "resistance of the people" and perhaps civil wars.

Dr Issing is not a German nationalist. He is open to the idea of an authentic union with a "European government controlled by a European Parliament" on democratic principles.

What he opposes is the deformed halfway house that is now Europe, where supra-national bodies – accountable to no elected body and taking decisions behind closed doors – are usurping legislative primacy over tax and spending. As he reminds us, it was monarchical assault on the power of the purse that led to England’s Civil War, and America’s Revolution.

Large matters.

As for the assurances of Mr Schauble, either he really is lying, in which case there will be all Hell to pay in the Bundestag, and most likely a massive political backlash that will change German politics profoundly.

Or he is not lying, in which case there is no plan to save the eurozone, and we therefore face the mounting risk of a spiral into a banking crash, serial sovereign defaults, and a disorderly break-up of EMU.

Not pretty.

Italy, EMU and the Evil Eye

Italy has a primary budget surplus and low private debt. So why sell?

For those in Euroland convinced that Anglo-Saxon hedge funds and speculators are responsible for the sorry state of the Italian bond market (seemingly the view of EMU’s entire governing class), here is a nugget from a Swiss blue chip investment house.

Dieter Wemmer, CFO of Zurich Financial Services, said his group had slashed its holdings of Italian government bonds by €2bn since June 30, cutting its exposure to €6bn.

It also had €5bn of Spanish debt and €18bn of Greek debt.

Much of the capital flight from Italy is crossing into Switzerland, so the Swiss have a good insight into the behaviour of the Italian financial elites.They know what Italy’s insiders are doing.

The ZFS announcement follows a revelation by Deutsche Bank that it had cut its exposure to Italy from €8bn to €1bn by hedging (ie, buying insurance) through the CDS market.

These are not hedge funds. They are real money accounts, and they give us a glimpse into what is happening.

Italy has a primary budget surplus, the best fiscal profile of the G7, and low private debt. So why do Swiss investors want to pull out?

Why are other countries with their own sovereign currencies and central banks able to borrow at barely over 2pc for ten years despite awful public finances, while Italy had to pay 6pc until the ECB intervened this week, and still has to pay 5pc now?

I hate to keep repeating an elementary point but currency unions switch exchange rate risk into default risk. Italy’s current travails are a direct result of — and function of — EMU membership.

The deeper issue is that Italy is 20pc over-valued within EMU and is now trapped in very low growth and a stubborn current account deficit. This is a slow rot. It is directly linked to EMU membership.

Italy could have used the decade and half since Euroland’s currencies were locked together after Maastricht to free up labour markets and carry out the `micro’ reforms needed to make EMU viable. It did not do so. It is very late in the day now.

Yes, before Euroland readers all scream “what about the mess in Britain?”, let me repeat for the millionth time that I don’t write about Britain. The rest of the Daily Telegraph is giving blanket coverage to the current stew of riots, knife attacks, and anarchy in British cities.

Britain is of course in a terrible mess, but Gilt yields nevertheless fell below 2.5pc this morning. The UK is very lucky that it still has the sovereign instruments to mitigate the fiscal disaster left by Gordon Brown.

Italy has the ECB, and behind it stands Germany. Whether Germany will continue to stand behind the Project as the cost rises is the great unknown. That angst is what is really eating away at markets.

Linde chief Wolfgang Reitzle caught the mood when he said: “I am fundamentally for the euro, but not at any price — above all not at the price of socializing the debts of other countries.”

I suspect that is the true voice of Germany, whatever the German ministers may say to please peers in Brussels.

Eurogeddon postponed again as ECB gains three weeks

ECB president Jean-Claude Trichet

Eurogeddon is postponed again. Jean-Claude Trichet has saved civilization. There will not be a spiralling bond crisis in Italy and Spain in early August after all. An imminent disintegration of Europe’s financial system has been averted.

On balance, this is good, though not optimal. (Lancing the boil immediately by organising an orderly German exit from EMU would be better: it would halt the Fisherite debt-deflation spiral in Club Med and clear the way for recovery.)

Spanish 10-year yields dropped 85 points to 5.2pc, Italian yields fell 76 points to 5.32pc in the first hour or so of trading after last night’s announcement.

Now for the hard part. Unless the ECB is willing to back up its new role as lender-of-last-resort with massive purchases of Italian and Spanish debt, it will inevitably be tested by markets. Weak hands will take advantage of rallies to offload holdings onto the ECB, i.e. onto eurozone taxpayers. Frankfurt will find itself underwater very quickly without a legal mandate or EU treaty authority.

RBS calculates that the ECB will have to buy roughly half the outstanding tradeable debt of the two countries to defend the line. RBS calculates €850bn. I would put it nearer €1 trillion.

This is currently impossible. The ECB is acting as a temporary back-stop until the revamped EFSF bail-out fund is ratified by all parliaments over coming months. The EFSF will then take the baton.

Yet as we all know, the EFSF has no money. The parliaments have not even ratified the earlier boost to €440bn. As of today, the fund has barely €80bn left after all the commitments to Greece, Ireland, and Portugal. It remains a fiction.

As for boosting it further to €2 trillion or more – as suggested by Citigroup, RBS, and the European Parliament – we face a little local difficulty across the Rhine. Bavaria’s Social Christians said they will not back one bent Pfennig for extra bail-outs, and the FDP Free Democrats are almost of the same mood. Angela Merkel’s CDU base is more mutinous by the day. In any case, such an expansion of the EFSF would set off its own chain-reaction as France and then Germany lost their AAAs and slithered into the swamp.

So, obviously markets will turn very nervous once ECB purchases approach the level that corresponds to the EFSF ceiling. They know that the ECB’s Teutons will die in a ditch rather than cross that line, taking the bond risk directly onto the ECB’s own balance sheet.

That moment could come within three weeks.

Gary Jenkins from Evolution Securities notes that Greek yields fell from 12.43pc to 7.35pc in the week following the ECB’s first bond purchases, only to fly out of control six weeks later.

Good template.

Whether buying time can solve anything depends on whether investors believe that Italy and Spain can grow their way out of debt traps. If we are on the cusp of a new global boom, then Italy and Spain can make it within EMU’s current structure.

If we are going into a global double-dip (defined as global growth below 2.5pc), they have no chance at all unless the ECB throws all caution to the wind, defenestrates the two German members from the 36th floor of the Eurotower, and embraces QE a l’outrance.

Germany might not like that.

I have a nasty feeling that nothing whatsoever has been resolved.

Euroggedon postponed again as ECB gains three weeks

ECB president Jean-Claude Trichet

Euroggedon is postponed again. Jean-Claude Trichet has saved civilization. There will not be a spiralling bond crisis in Italy and Spain in early August after all. An imminent disintegration of Europe’s financial system has been averted.

On balance, this is good, though not optimal. (Lancing the boil immediately by organising an orderly German exit from EMU would be better: it would halt the Fisherite debt-deflation spiral in Club Med and clear the way for recovery.)

Spanish 10-year yields dropped 85 points to 5.2pc, Italian yields fell 76 points to 5.32pc in the first hour or so of trading after last night’s announcement.

Now for the hard part. Unless the ECB is willing to back up its new role as lender-of-last-resort with massive purchases of Italian and Spanish debt, it will inevitably be tested by markets. Weak hands will take advantage of rallies to offload holdings onto the ECB, i.e. onto eurozone taxpayers. Frankfurt will find itself underwater very quickly without a legal mandate or EU treaty authority.

RBS calculates that the ECB will have to buy roughly half the outstanding tradeable debt of the two countries to defend the line. RBS calculates €850bn. I would put it nearer €1 trillion.

This is currently impossible. The ECB is acting as a temporary back-stop until the revamped EFSF bail-out fund is ratified by all parliaments over coming months. The EFSF will then take the baton.

Yet as we all know, the EFSF has no money. The parliaments have not even ratified the earlier boost to €440bn. As of today, the fund has barely €80bn left after all the commitments to Greece, Ireland, and Portugal. It remains a fiction.

As for boosting it further to €2 trillion or more – as suggested by Citigroup, RBS, and the European Parliament – we face a little local difficulty across the Rhine. Bavaria’s Social Christians said they will not back one bent Pfennig for extra bail-outs, and the FDP Free Democrats are almost of the same mood. Angela Merkel’s CDU base is more mutinous by the day. In any case, such an expansion of the EFSF would set off its own chain-reaction as France and then Germany lost their AAAs and slithered into the swamp.

So, obviously markets will turn very nervous once ECB purchases approach the level that corresponds to the EFSF ceiling. They know that the ECB’s Teutons will die in a ditch rather than cross that line, taking the bond risk directly onto the ECB’s own balance sheet.

That moment could come within three weeks.

Gary Jenkins from Evolution Securities notes that Greek yields fell from 12.43pc to 7.35pc in the week following the ECB’s first bond purchases, only to fly out of control six weeks later.

Good template.

Whether buying time can solve anything depends on whether investors believe that Italy and Spain can grow their way out of debt traps. If we are on the cusp of a new global boom, then Italy and Spain can make it within EMU’s current structure.

If we are going into a global double-dip (defined as global growth below 2.5pc), they have no chance at all unless the ECB throws all caution to the wind, defenestrates the two German members from the 36th floor of the Eurotower, and embraces QE a l’outrance.

Germany might not like that.

I have a nasty feeling that nothing whatsoever has been resolved.