“We seem to have entered the last days of the euro as we currently know it,” Credit Suisse’s Fixed Income Research team writes in a note out this morning. “The fate of the euro is about to be decided.”
Market pressures are swiftly coming to a head, and EU leaders will be forced to take stronger action to respond to the crisis.
Investor fear is causing conditions in the euro area—particularly for Italy and Spain—to deteriorate rapidly, and if EU leaders are to rescue the currency, they probably have to do it by mid-January.
Credit Suisse analysts don’t see a euro break-up on the horizon, but they do say “some extraordinary things will almost certainly need to happen” for the currency and the monetary union to last. That’s because markets will no longer be able to tolerate halfway measures:
In the short run, [the crisis] cannot be fixed by the ECB or by new governments in Greece, Italy or Spain: it’s about markets needing credible signals on the shape of fiscal and political union long before final treaty changes can take place. We suspect this spells the death of “muddle-through” as market pressures effectively force France and Germany to strike a momentous deal on fiscal union much sooner than currently seems possible, or than either would like. Then and only then do we think the ECB will agree to provide the bridge finance needed to prevent systemic collapse.
They add that debate will escalate around common euro area bonds this week, with proposals forthcoming from the European Commission. Some analysts have argued that eurobonds could culminate in fiscal integration and an end to Europe’s problems.