Eurozone: losing faith

The eurozone has come under the radar again. And what a quick comeback it was. After merely three odd months of the European Central Bank (ECB) jumping in to bail-out Greece, the ECB spend Euro 22 billion on government bonds a few days back to keep borrowing costs for Italy and Spain - the third and fourth biggest economies of the eurozone - under control. The move helped calm down bond yields of Italian and Spanish bonds from the above six percent reached as investors got wary as Italys mountain of debt came under scrutiny. With Italys debt stock of 120 percent of GDP, and the country accounting for 23 percent of all eurozone sovereign debt, the investors apprehension appears well placed. Italy is not the only one bearing the brunt of a eurozone crisis. The economic catastrophe had bled into other EU countries such as Ireland, Spain and Portugal previously, with their high debt levels coming in the spotlight. But even more worrisome are talks about the crisis spreading to France, the so-called second pillar of the European currency alongside Germany. These fears were stoked by Frances zero-growth in the second quarter this year, raising questions about the countrys public finance management. "When Standard & Poors knocked the United States off its triple-A perch...,markets started looking for who else might be in line, turning a spotlight on France, with the biggest debt and deficit ratios among the six AAA-rated euro zone countries," quoted the Reuters. Given that France is a stronger member of the eurozone, expected to support weaker members such as Greece and Ireland, doubts over the sustainability of the European bloc surface when the saviour itself could do with some assistance. The situation is such that the question is not merely about the debt sustainability of the eurozone countries. The grave reality is that investors are gradually losing faith in the 17-member bloc, and this could mean an escalation of borrowing costs and the contagion effect of heightened risks of default of some members as investor confidence erodes. The New York Times talked about some economists in Germany being keen to see Greece exit the eurozone temporarily, claiming this would not only benefit the eurozone, but also help Greece perch up on its feet without the umbilical cord of support from other eurozone countries and the ECB. But this is easier said than done. While this would set a precedent for other countries to just flee from the eurozone when on the brink of default, it will also pose question marks over the strength of the eurozone and even trigger a disintegration in the worst case. The choice is not an easy one for eurozone with several members coming under the spotlight. Even the slightest reckless move by any member can have a catastrophic contagion, and therefore, a solution has to be very cautiously drafted. "Some countries would suffer, and some would not be able to stay...Whoever wants to be a member of the euro zone has to follow the rules, and undertake the necessary reforms...that would strengthen trust in the euro," said Matthias Kullas, an economist at the Center for European Policy in Freiburg, Germany. From the look of it, it appears that some hard choices might have to be made, even if it means setting precedence by getting rid of the spoilsports of the bloc.