The Spanish banking crisis is forcing another showdown in Europe with the German-led Northern contingent increasingly under siege not just from the South but now from just about everyone else. Spain is under pressure to finance a bank recapitalization, but worries that that path will push them straight into a Troika bailout program. And we all know just how well that has worked for Greece and Ireland and Portugal. And Spain holds real leverage. No one is under the delusion (while, almost no one) that Spain can exit the Euro without significant economic damage throughout Europe. Hence we are seeing increasing pressure on Germany to step-up the timetable to real fiscal integration, starting with a Euro-wide banking rescue using ESM funds. From Bloomberg:
German Chancellor Angela Merkel was besieged by critics for letting the euro crisis smolder, with the leaders of Italy and the European Central Bank demanding bolder steps to stabilize the 17-nation economy.
Italian Prime Minister Mario Monti and ECB President Mario Draghi pushed Germany to give up its opposition to direct euro- area aid for struggling banks. Monti further antagonized Germany by urging a roadmap to common borrowing.
The idea is to let banks tap the funds directly without going through their respective national governments - thus avoiding another Troika bailout disaster. Germany, of course, continues to resist, as this would force them to give up one of their tools to enforce austerity throughout Europe. Perhaps, however, German Chancellor Angela Merkel is starting to break under the pressure:
Merkel put some nuance into the German position today. While promising “no taboos” in attacking the crisis, she floated a timeline of “five to 10 years” for fixing flaws in a currency shared by countries with divergent wealth and attitudes toward taxing and spending.
Of course, Europe doesn't have a 5 to 10 year horizon. I am thinking they have something closer to a 5 to 10 week horizon to get their act together. Something big is going to happen in Europe this summer, and I think the odds of a tail-end outcome are increasing, at both ends of the tail. Either Europe pulls together sooner than the German timeline, or finally blows apart. The middle-ground, muddle-through option looks less attractive each day.