Mrs Merkel blinks first?

The very day after I lambasted Angela Merkel for her failure of leadership in the Eurozone, the Torygraph reports here that Mutti is showing signs of relenting on her opposition to Eurobonds.  Now the writer of the Torygraph article, Ambrose Evans Pritchard, is a well known Eurosceptic, and should be taken with a pinch of salt.  But if he is right, and Mrs Merkel is willing to drop her opposition to a European Redemption Pact, that is quite big news.

How would the ERP work?  Not surprisingly details of a fund that doesn't yet exist are sketchy, but the idea seems to be that countries' debts above and beyond the 60% of GDP permitted by the Maastricht treaty (remember that?) would be gradually transferred into that fund, paid for by bonds issued jointly by Eurozone countries, and supported by collateral from within the existing reserves of individual states.  Effectively it would allow struggling countries to borrow at bond rates more like those of the Germans.

Obviously I do not know whether this will work in the long term.  The interesting thing is that two of Germany's opposition parties say they support the idea, and Frau Merkel depends on their support to get the recent Stability and Growth Pact ratified.  Ultimately these things only work if the financial markets believe in the structure, and any such scheme will be examined in cold-eyed forensic detail by people who are really interested in money.  So it may not fly.

The overarching problem of the Euro however, namely the crippling currency imbalance between northern and southern Europe, is not remotely addressed by the ERP.  It will do nothing to make Spain, for instance, more competitive or German exports more expensive.  At very best it looks like the mother of all can-kicking exercises, guaranteed to stave off the immediate borrowing problems faced by Italy and Spain, but doing absolutely nothing to solve the design faults which led to those borrowing problems in the first place.  As Evans Pritchard himself wrote when this idea was first mooted at the end of May, "the South would still face the long grind of internal devaluation - or wage deflation - breaking societies on the wheel".

As the financial crisis limps on, those at the top, their careers founded on devotion to The Project, have displayed a striking tenacity and inventiveness in keeping it going.  As long as the Euro is limping on, breaking societies on the wheel will seem to them a small price to pay.  Because, secure in their well remunerated jobs, it is not being paid by them.