The EU's Choice

     Their choice is evidently quite stark. Edward Harrison over at Naked Capitalism puts it this way: "Should the ECB go all-in or not? There aren’t a lot of options. No one is going to buy Italian bonds at a low yield without a backstop, irrespective of austerity now that the insolvency genie is out of the bottle. With a backstop, some people will. An Italian default equals the insolvency of the Italian banking system. An Italian default means massive losses for German and Dutch banks and beyond. Any scenario in which there is an Italian default leads to a Depression with a capital ‘D’. The question is a political one and, hence, unpredictable. The Germans (and Dutch) either allow the backstop or face Depression. It’s as simple as that."

    Wow those are choices! "The reason no real alternative to the ECB’s acting as a lender of last resort is offered by hawkish types is because the alternative is economic collapse – and recognising this is not politically palatable. We know that Italy will default without the central bank based on the analysis above. Italy’s default would trigger a cascade of interconnected bank runs default and Depression as did the insolvency of Creditanstalt in 1931. Could Italy unilaterally exit the euro zone and renominate euro debts at par into a new Lira currency to forestall the default? Perhaps. That is something to consider at a later date. For now, here’s what will happen if Italy defaults."

    http://www.nakedcapitalism.com/2011/11/italian-default-scenarios.html

    Unfortunately a lot is riding over in Europe right now. With an American economy whose fundamentals appear to be improving. the spectre of the EU continues to be a drag on world markets. For this reason President Obama along with Canada, China and Japan have implored the EU to get off the pot and do something.

    http://diaryofarepublicanhater.blogspot.com/2011/11/eurozone-making-britain-look-smart.html

    This has the potential to get very nasty unless the ECB does its job-which is assuming the role of lender of last resort. If not the EU project will fail. Just how nasty this can get was suggested by a report by the Bank of England that just came out. The BOE unlike the ECB which raised rates a few times already this year has continued to promote an expansionary path despite 5.2 percent inflation arguing that it is the result of shocks.

    However, here is what the BOE sees as the biggest threat to Britain: "Implementation

of a credible and effective policy response in the euro area would help to reduce uncertainty and support UK growth, but its absence poses the single biggest risk to the domestic recovery."

   http://www.bankofengland.co.uk/publications/inflationreport/ir11nov.pdf