Saving the Euro requires action on a huge scale

It lies with the politicians to convince international markets that the euro is worth saving. Markets, and in particular, speculators, continue to bet against it and the single currency faces potential ruin. Yes; it has got that serious. Nothing short of a series of drastic financial measures from politicians of euro-zone governments is required to avert the crisis, and shore up the euro.

A rescue would need to achieve several things. Firstly transparency is required. What is the real extent of debt in eurozone countries? The debt of those countries that is now too high to realistically pay back, must be restructured properly.

Secondly, a sovereign default from a member state is not beyond the realms of possibility; and Europe’s banks need to be sufficiently capitalised to withstand such a shock. Thirdly, somehow growth needs to be stimulated. The policy of budget-cutting, which has proved to be tantamount and as futile as drawing blood out of a stone, must be discarded. Lastly, Europe needs to learn from its mistakes; ensuring the like of all this is never repeated.

The last part is something for another day. The debate and formulation of new policy is a luxury Europe can currently ill afford. But, as for the first three, the markets smell blood. The fragility of banks, uncertainty over the real extent of the debt crisis, as well as the procrastination of politicians, all play into the markets’ hands.

The strategy of driving enfeebled economies further into the mire causes further loss of credibility. It makes things worse, and stymies any potential for countries to grow out of this mess. Tell investors the truth about the insolvency of some of its members, and Europe can begin to rebuild. Markets hate uncertainty.

If markets suddenly become nervous about the state of some of the more solvent countries in the eurozone, this contagion would have catastrophic consequences. The European Central Bank (ECB) must do everything in its power to prevent the crisis spreading further.

Countries such as Greece cannot realistically leave the euro without causing a liquidity crisis, a run on their banks, and a hugely devalued domestic currency that would leave Greek companies owing money internationally, on the verge of bankruptcy. Conversely, Germany’s currency would soar were they to leave the euro, causing massive damage to their booming export industry.

One way or another, confidence has to be restored to the eurozone as quickly as possible. The problems are too numerous now for a solution to be found that will please everyone. But the worst outcome would be for the euro and the European project as a whole to fail.