By David Henry
Whatever it takes. Ever since the euro crisis started, this is the message that German Chancellor Angela Merkel and French President Nicolas Sarkozy have delivered to defend the common currency. Until last week.
On Friday, Italian Prime Minister Mario Monti, who has been in his country's top post for barely two weeks, announced the make-or-break scenario that even ``Merkozy'' would recognize as a monetary meltdown: an Italian default. After a meeting of the three leaders, Monti said Sarkozy and Merkel ``confirmed their support for Italy, saying that they are aware that the collapse of Italy would inevitably lead to the end of the euro.''
The Italian word that Monti's office used was ``crollo,'' which means crash, fall or collapse -- all of which would happen to the economy if Italy were unable to service its debt. The country's two-year borrowing costs have doubled since early September. The European Financial Stability Facility, the region's bailout fund, doesn't have the resources to stand behind Italy's government debt of 1.9 trillion euros ($2.54 trillion) -- much of which comes due next year -- and is unlikely to win the support of national parliaments for more funding. So a default would mean a collapse and would be anything but orderly.
Monti's missive adds another -- this time ominous -- caveat to the ``whatever-it-takes'' creed parroted at the various rescue summits of the past year. In France earlier this month, Merkel and Sarkozy broke a lesser taboo when they questioned Greek membership in the euro if a referendum on adopting the austerity measures necessary to secure more bailout funds failed in the Hellenic state. ``The referendum will revolve around nothing less than the question: Does Greece want to stay in the euro, yes or no?'' Merkel said. This raised the possibility of an exit for member states and demonstrated that patience is finite in Berlin and Paris.
Last week, however, the leaders of the euro area's three largest economies spoke in hypothetical terms about ``a stalemate in the process of European integration'' -- meaning checkmate for the euro. Bilateral austerity contracts, which newspapers reported over the weekend, may be the preferred solution to fast-track debt reduction and could be the last chance to save the currency.
The latest sign that the euro project may not be bulletproof might just be another public-relations blunder, which the Italian government turned into a national sport under Silvio Berlusconi. Or maybe Prime Minister Monti was simply firing a shot across the bow of his parliament, which he may think doesn't have the stomach for any more austerity. Whatever the reason, the worst-case scenarios are only getting worse and Europe's two most important leaders are doing whatever it takes to make sure we all know about it.
(David Henry is a Bloomberg View editor.)
-0- Nov/28/2011 14:20 GMT