Last August, the euro-zone crisis moved into its "doomsday" phase: Suddenly, it wasn't just tiny, poor countries such as Greece and Portugal that were collapsing. Massive bedrock economies such as Spain and Italy were also in trouble.
And ever since then, a predictable dance has ensued. Every few weeks, Italy or Spain (or both) will see their bond yields spike to dangerous levels, which means they have to pay more to borrow money and get closer to needing a full bailout from the rest of Europe. In response, euro-zone officials devise some clever half-measure to placate the bond markets. That works for a brief spell, at least until the markets realize that the half-measure is just a half-measure. At that point, Spanish and Italian bond yields spike back up again, prompting the scramble for yet another temporary fix. Repeat ad infinitum.
And as it turns out, this little dance is losing its effectiveness. Kathleen Madigan highlights a new study from the Royal Bank of Canada finding that the positive market boost from each new announcement by European officials is becoming more and more fleeting. Back in August, a bond-buying plan by the European Central Bank bought 48 days of peace. By contrast, the recently announced $125 billion bailout of Spain's banks placated the markets for just five days:
As Madigan notes, "just as an addict comes down faster after each subsequent drug dose, the markets have shrugged off positive moves at a quicker pace."
Why aren't these moves placating the market? Partly because many of them are just a form of kicking the can down the road. For instance, the rest of the euro zone didn't want to bail out Spain's banks directly — that would have put countries like Germany and the Netherlands at risk if Spain's banks failed. So instead they lent the Spanish government up to $125 billion. But, of course, that just made everybody worried about the Spanish government, which has already loaded up on debts and guarantees.
So what might a more permanent solution look like? Over at FT Alphaville, Simon Hinrichsen posts a handy little "cheat sheet" from the French bank Société Générale. The chart ranks various euro-saving schemes by effectiveness. The problem is that all of the simplest measures — like approving a bigger European "bailout fund" — aren't expected to have much impact. (Remember, the bailout fund probably isn't big enough to backstop Italy and Spain if those countries have trouble borrowing money and face a cash crunch.)
By contrast, the measures that SocGen thinks could be genuinely effective — like having the European Central Bank buy up bonds or instituting a Europe-wide banking union — all face steep legal and political hurdles. Basically, the stuff that works is impossible and the stuff that's possible doesn't work. It's not surprising, then, that the sugar highs are getting shorter and shorter.