The euro area on the deck of Titanic

This week, the CAC 40 has posted a series of drop, showing levels not seen for a long time, demonstrating the failure of the new European level. And if Jacques Sapir and Emmanuel Todd, who had planned the end of the euro in late 2011, were right?

75% of the way to the explosion was done

Two figures determine the status of the situation: the rate of government bonds to ten years for Spain and Italy. A year ago, rates were below 4%. One month ago, they were less than 5% for Italy and 5.5% for Spain. The crisis of the early summer caused a further increase of one point (meaning, ultimately, a higher cost of interest on the debt of Italy equivalent to 1.2% of GDP, or about €20bn ).

The European Agreement on July 21 resulted in a slight lull but the rates have barely fallen for several days. Actually, this long crisis of the euro area looks like a gradual increase in fever, without any real drop on the thermometer. The pressure rises incrementally while the various European plans do not seem to solve anything. On Tuesday, the Spanish rate reached 6.36%, 6.16% for Italy.

Big shock in sight?

Herman Van Rompuy may well close his eyes, damages are there. And it's probably because we are in August that the media do not seem to grasp the gravity of the situation. Indeed, most analysts consider that beyond 6.5 to 7% interest rate, the European sovereign debts will be difficult to manage. Actually, Spain has suffered in one year an interest inflation equal to 2% of its GDP. It is 4% for Italy!

Of course, Spain has one of the lowest public debts among Euro countries. And Italy is partially protected by the maturity of its debt, which reduces the speed of propagation of higher rates, as well as by the fact that its debt is mostly domestic. But we are quickly approaching the alert threshold. If ever the cape of 6.5% was exceeded, the euro area could quickly enter a terminal crisis. Indeed, if this rate exceeded 7% in Italy, the situation would be completely uncontrollable. Rome’s debt is the largest in Europe (€1.9 trillion, i.e. 120% of GDP) and a new plan would commit France and Germany to disburse several hundred billion Euros, which seems highly unlikely. The only solution could be an exit from the Euro.

In late June, it seemed then that "the torment of the Euro could still go on." But this new onset of fever could lead to a rapid explosion if nothing is done.  

(Translation of Laurent Pinsolle's article published on August 4th on http://www.agoravox.fr/)