The past weeks have been stressful in more than one way. Sure midterms and paper deadlines caused a few sleepless nights but mostly the euro crisis has been on mind. A more than healthy chunk of my daily routine is now devoted to bond yields, exchange rates, credit default swaps and any other information I can get my hands on. The result? I still don’t know.
I don’t know what is the best or worst course of action. Nor do I know what is likely to happen and frankly, it seems nobody else does either; least of all those who are supposed to lead: politicians. Broadly speaking there are three options proposed: a Eurobond, a ECB bailout and a split of the euro. At this stage none of these options are particularly favourable.
Academics have been mostly in favour of the Eurobond proposal. One bond backed by the entire European Union would eliminate most risks for investors. This would immediately lower the borrowing costs for the troubled countries but costs would go up for Germany and other ‘disciplined’ countries. Not surprisingly those countries that stand to lose the most are also the most vocal opponents of the Eurobond. However, arguably the biggest problem is that the proposal includes further EU integration at a time when there are strong anti-Europe sentiments in, for example, the Netherlands.
Irrespective of its qualities it is probably too late to move to a Eurobond, and with several countries near collapse investors might not be convinced regardless. This is probably why the proposal for an ECB bailout has gained momentum in the past weeks. The European Central Bank is only the institution with the firepower necessary to squash any market sentiment and lower interest rates. However, Germany and its Bundesbank are not ready to go this far. Any ECB intervention will inevitably lead to increased inflation with the risk of hyperinflation if not properly managed, a prospectus of which the Germans are especially sensitive.
If there is anything that commentators agree on it is that a split or break-up is likely to be extremely costly. In economic terms it can result in bank runs and a round of write-downs on foreign debt (think Lehman Brothers). Furthermore, businesses will suddenly have to adapt to a completely new economic environment. Politically, it would be a deathblow to the European ideal and its even questionable if the EU will have any meaningful role to play afterwards. Hence, for a long time a split or break-up was not even considered, the fact that it is even mentioned just proofs how dire the situation really is.
Whatever happens, our image of Europe, economically and politically, is going to change drastically. That much is for sure. And time will tell if that will be for the better of Europe or for the worse.
Post Scriptum:
Another chess problem, same rules as last time. First correct solution earns a drink at Julio’s bar. Solutions can be send by mail or shown in person. White is to move and win.
HINT: The key to the position is the defence of white’s pawn on e4 by the bishop (which will be chased by the black king) but white can only win by moving his king all across the board to take the black bishop. Hence, the solution is rather long but once you get the concept it is quite easy.



