Despite the intense pressure that EU nations and the United State are putting on German Chancellor Angela Merkel, Germany still seems inflexible to any solution that isn't orthodox and in line with the model that has allowed it to become the only major EU nation to avoid a recession. Merkel recently said no to Italian Prime Minister Mario Monti's suggestion that the European bailout fund and the ECB should buy debt from Spain and Italy. She denounced the suggestion in Mexico at the G20 summit. Several hours later, already in Germany, Merkel qualified her statement: "It's a possibility, but it's not up for debate right now."
What happened that caused this shift in attitude? Political cynicism or deeper reasons? One figure: yesterday Spanish bonds dropped beneath 7% and the risk premium relaxed, and German bond yields rose to 1.62% from 1.17%, where they were three months ago.
Markets are quiet due to doubts about Europe's future, and they are starting to doubt the stability of the German bond, which until now has provided safe refuge for investors. If Spain needs an official bailout, then Italy will fall subsequently, and so will the euro.
Merkel needs to understand this point and take near-term measures to prevent Europe from collapsing while at the same time building a more-integrated, long-term future for the euro zone.
Before getting stuck going down a dead end street, Germany ought to come up with a plan or accept the plans on the table if it wants current initiatives to succeed. Today Spain quantified the extend of the financial sector bailout, Greece appointed government officials with surprising speed and on Saturday Merkel, Hollande, Monti and Rajoy will meet in Rome. They all must understand, for the sake of the euro zone, that when markets suffer everyone hurts, even those that still think they aren't being affected by the crisis.
