Europe on the Brink

From The Huffington Post:

Posted: 11/27/11

Europe is now on the very edge of an economic abyss. And Germany is finding that it cannot survive as a smug island of fiscally conservative prosperity while the rest of Europe goes down the tubes. It is anybody’s guess whether Europe’s leaders will shift course in time. If they fail, it won’t be pretty. The fact that Germany’s fate is now more closely linked to that of its neighbors actually offers a ray of hope.

Until last week, Germany had been the safe haven. As speculators pulled money out of other countries, in a bondholders’ equivalent of a run on the bank, German government debt was oversubscribed, causing interest rates on German bunds (government bonds) to fall below 2 percent. The spread between German rates and the rates that “weaker” countries had to pay to sell their bonds was treated as a precise barometer of market confidence in a given nation’s debt.

For the Germans, this was a huge windfall. My friend Sony Kapoor, who directs the progressive think tank Re-Define in Brussels, calculated that Germany’s cheaper borrowing costs due to the panicky bond-market flight from nations like Greece, Italy, Spain, Portugal and Ireland saved the Germans some $26.7 billion in interests costs between 2009 and 2011, and another $20 billion in low-interest bonds already locked in for the future. (It is no accident that the word Schadenfreude — translated as joy at another’s misfortune — is a uniquely German coinage.)

But then on Thursday, as Americans were taking a day off for Thanksgiving, the unthinkable happened. Germany had trouble selling its bonds. The bond market, in its panic, was fleeing even the safest haven. Europe is now approaching a Lehman Brothers moment, where nobody trusts anybody else’s promise to repay a debt.

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