Guest post. Translated from the French by Tim Gupwell

Once more, the crisis has taken a turn for the worst in the days after a summit which was intended to resolve it. Barely ten days ago, two practical decisions came out of it, and neither has been implemented in practice; nothing has really been done to seriously calm the bond market, while the link between public and private debt in Spain continues to be tightened, the complete opposite of the stated objective.

From meeting to meeting, the contradictions which seem insurmountable and resistant to compromise seem to be reaching a critical mass.

Spain has become associated with the idea of an inevitable disaster to such an extent, that it is already in the process of benefitting from a bail-out plan under another name. But not to worry, if one looks at the conditions attached for the rescue of the banks, it is clear that the risk is going to stay in Spain and won’t cross its borders! They are going to be bailed-out, put under the supervision of Europe, their shareholders forced to contribute, and the public deficit will be increased by the same amount. At the same time, the Government has just announced a new set of austerity measures which they estimate at 65 billion Euros over two and a half years, the effect of which can only be to accelerate the drop in fiscal receipts on the pretext of increasing them. The extra year granted to lower the deficit below the 3% of GDP mark does nothing more than prove the unrealistic nature of the previous timescale, without rendering the new one any more credible.

This cannot be the end of it because the government has to find 34 billion Euros before the year end and its short term bond issues are making it extremely vulnerable to any upcoming market tensions, particularly when one considers the frequency with which they occur. The resulting additional costs can be absorbed for a certain time, but cannot be maintained over the long term. Even more so as increasing bond rates are having an impact on other parts of the Spanish economy. We are on unknown ground: the arrival of a real bailout plan worthy of the name is only a question of time. Without further delay, the Government will have to find a solution for all the ordinary savers, ruined after having been incited to buy assets which were intended to consolidate the balance sheets of the banks.

For the very first time, Mario Monti has admitted that the Italian Government cannot exclude the possibility of having to be rescued by a European fund and placing itself under its wing. As if he were sending out a final warning, he seems to have learnt his lesson from the deafening silence which met his repeated calls for a means, any means whatsoever, to be found of easing the tensions in the bond market. Italy is only inching forward in the pursuit of its bond issue program, but the deadlines are there.

In Germany the Constitutional Court has decided to take its time before rendering a verdict on the creation of the ESM, causing significant holdups to the whole process. Expressing an further contradiction in a situation which is already full of them, it might well impose the holding of a referendum to ratify it, in accordance with the principle enounced by Andreas Voßkuhle, its president, that the “even in unusual crisis situations the German constitution should not be ignored”. Wolfgang Schäuble the Finance Minister warned of the reactions of the markets.

For Mario Draghi, the President of the ECB, the issue is clear, “governments will have to hand over some of their sovereignty; there is no way round it”. He explained that what he calls “ a transfer union” – for which a number of what he calls ‘rather intelligent’ ideas have been proposed – can only be the final stone laid in a construction which needs to start with budgetary union, then banking and finally political. Things must be done he said, “in the right order” but he refrained from estimating how long all this would take. The problem is how to manage in the meantime?

Due to a failure to agree to a radical adaptation of a strategy which still aims to pay the debt-reduction invoice with public finances, the decisions taken do not get very far when it comes to putting them into practice.

Sir Mervyn King, the Governor of the Bank of England, has deplored the “great black cloud of uncertainty” which is hanging over the entire world, resulting from a “strategy of postponing tackling the fundamental problem”. In the meantime, he continued, “the problem is getting bigger all the time and the scale of debt that will ultimately have to be resolved in one way or another is growing”. His clairvoyance does not however go as far as to envisage that at the end of the day it just can’t be…… Nor does it extend to the formation of other clouds in Asia, that Eldorado of which so much is expected and where the two great economic powerhouses are, likewise, currently struggling with very serious problems.

In Japan, the Government has been caught between, on the one hand, the need to finance a revival of the economy in another attempt to escape the deflationary cycle, and, on the other, the prospect of killing off any growth by increasing VAT, thus reducing consumption at a time when exports are already suffering from the repercussions of a stronger Yuan and the recession in Europe. The Bank of Japan is going to dedicate another seminar to this dilemma, its monetary instruments having reached the end of the road. All that remains at its disposal is to employ non-conventional asset purchase measures, via a new round of monetary creation which it had kept aside as a last resort for exceptional circumstances.

As for the Chinese leaders, they are striving to « stabilize growth », by which they mean to bring a halt to the continuing economic slow-down which is more and more apparent. To this end, Wen Jiabao, the Prime Minister, has identified three components: boosting consumption, the “diversifying exports” (to new partners) and a “reasonable growth in investment” (the end of the wasteful mega-projects and property construction left, right and centre).

The task remains “long-term and arduous”, he recognized, implicitly acknowledging that the reorientation of the Chinese economy is meeting numerous obstacles and that the status-quo difficult to overcome. They have to take the plunge, which will not be easy.

In the immediate term, boosting credit to stimulate growth would also stimulate an extremely painful inflation for the vast majority of the Chinese; neither will a relaxation of the reserve requirements for banks nor a lowering of the Central Bank’s main interest rate lead to additional credit as the Prime Minister wishes………

After the Japanese economy got stuck in a rut, are we also witnessing the end of the Chinese miracle, of which so much was expected? Recent history is littered with examples of fleeting economic miracles, praised to the skies before turning out to be catastrophes. In Europe, they were known as Ireland and Spain, those two countries in which huge property bubbles have been formed. But with the time for miracles having already passed us by, has it also passed by for the redemptive sacrifices which are being promised to us for long decades to come? As the famous phrase goes, ‘eternity is a long time, especially towards the end’.