Europe's Non-Final Final Resolution

| Sun Oct. 30, 2011 9:50 AM PDT

Guess what? Last week's resolution of the eurozone crisis is turning out to be about as successful as all the past resolutions were:

Initial relief over Europe's latest attempt to end its debt crisis faded on Friday as investors fretted about the plan's lack of detail and grew more skeptical about Italy's turnaround effort....On Friday, attention focused on Italy. The nation is saddled with €1.9 trillion in debt, with more than €200 billion of it coming due next year. Some investors worry that unless Italy lowers its borrowing costs, it could become the center of a renewed flare-up in the crisis. In Friday's bond auction, Italy was forced to pay more than 6% interest on its new 10-year debt, approaching levels that some analysts said the country can't afford for long.

...."The truth of the matter is that the issues are not entirely resolved," said Steven Walsh, chief investment officer at bond manager Western Asset Management, which oversees $433 billion...."The firepower of this fund…is not enough to calm fears," said Silvio Peruzzo, an economist at RBS Global Banking & Markets in London.

Nobody should be surprised that this is such a hard problem, of course. Fundamentally, someone is going to lose absolutely gigantic sums of money, and figuring out who that someone is going to be was always going to be a fraught affair. As near as I can tell, though, each rescue effort seems to advance asymptotically toward honesty about the scale of the losses, realism about the need to allocate those losses among the non-broke members of the EU, and acceptance among the broke members that they're going to be required to suffer fairly harshly in return for being bailed out. We obviously haven't gotten to the really truly final resolution yet — that won't happen until the European public truly accepts that they're screwed and they can't do much about it — but I suspect that last week's deal is one more step along the path of recognizing the grim reality of the situation.

Either that or Europe is going to implode. In the end, though, I don't think either the ECB or Angela Merkel will allow that to happen.

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