I was speaking to a European Commission insider over the weekend whose take on the situation was (these are his views and not necessarily mine):
• The Greeks lied to gain entry to the Euro and simply cannot sustain membership. It would be better for everyone, including Greece, if they left. The Germans would take a hit of about 100 billion but they deserve it because membership of the Euro has subsidised Germany.
• The Italians are generally OK except for their series of corrupt governments. They make things and have a real economy.
• Portugal does not have an economy to sustain membership of the Euro. While they did not have a property bubble, they just do not belong and membership of the Euro is affecting their cost competitiveness.
• Spain is in denial about what it has to do to maintain membership of the Euro. Spain has not accepted its losses on property and banks. However, Spain has an economy and can work through any problems if it makes the right decisions.
• No one really cares about high levels of government borrowing, It is perfectly natural and acceptable for a country like Ireland to have a debt of 100 billion as long as the interest gets paid and the economy of growing.
Make of this what you will.
Many people knew that the Greeks were lying when they joined the euro and the 'commission' told them to shut up. So its very easy to turn around and say that the Germans should take the hit. As we have found out, spending other peoples money is easy. The German saver may not be so happy and may tell europe where to go after their next general election.
The italians have a non democratic government at present presided over by an apointee. This may be ok in the short term, but could result in a permanent democratic deficit. Military rule anyone?
Portugal - who cares is the message.
Spain is in deep trouble. Banking losses, high unemployment an economy that is stagnant.
Implied that nobody cares about irelands high level of borrowing as long as the interest can be paid. OK in the short term, but as the deficit increases borrowing will increase and interest rates will increase resulting in rapid rises in loan interest payments. There will come a balance point at which this will be unsustainable and the country will crash. The 'commission' may not be so smug then.
The argument was that once there is a deal on bank debt, the underlying debt reduces to c. 100 billion which he said no one cares about once you pay the interest, the economy is growing and the market feels you are good for the debt.
The debt has to be serviced somehow. Who is going to do this? the taxpayer of course. Moving the bank loans off balance sheet doesn't get rid of them. Somebody is going to take a hit and despite Draghis comments, it ain't going to be the ECB.