Look at these charts that Win Thin has crafted on sovereign bond spreads.
Yes, the periphery looks bad. But look at Belgium, Austria and France. That’s the euro zone core.
As I predicted in August and reiterated most recently last week when I saw Belgium’s CDS indicating a one in four chance of default:
we are going to get another crisis flare. What you need is a trigger for a gap up move in yields that would signal the next flaring of the crisis. The trigger and its timing are unknown, but the crisis they will precipitate is inevitable until the euro zone’s structural deficits are dealt with. As this is a rolling crisis, any gap up will also infect Belgium and France and potentially Austria.
My hope is that Europe moves to address the medium- and long-term issues before the crisis flares. However, I don’t anticipate they will.
Belgium is clearly suffering some serious credit revulsion. France and Austria are being carried in tow. That’s where we stand now. The word is that the EFSF will get levered up and banks will be recapped. This may provide some relief but ultimately the euro crisis is more fundamental. Martin Wolf is right when he writes:
The fundamental challenge is not financing, but adjustment. Eurozone policymakers have long insisted that the balance of payments cannot matter inside a currency union. Indeed, it is a quasi-religious belief that only fiscal deficits matter: all other balances within the economy will equilibrate automatically. This is nonsense. By far the best predictor of subsequent difficulties were the pre-crisis external deficits, not the fiscal deficits
Deciding between breakup and deep fiscal integration is the only long-term crisis remedy