By Marc Brost – Heike Buchter – Mark Schieritz

One can’t even see this crisis, and that’s the dangerous thing about it. Tens of thousands of Germans are on holidays in Italy, relaxing on the beach at Viareggio or strolling through the streets of Florence. They are not witnessing mass demonstrations as they did a few weeks back in Athens and Madrid. They see no hate posters against Germans, as they did in Dublin and Lisbon.

As a visitor, one doesn’t see right off whether a country is facing economic collapse. Whether the money is threatening to drain away from a particular country, and whether or not it can even find more donors. One doesn’t see the threat – even when it’s hanging over the future of a whole continent

Since the start of the week Italian government bonds have been in freefall. The international lenders have been pulling their capital out so quickly and so massively that it has taken even financial market insiders by surprise. It’s true that Italy’s economy within the eurozone was always a doubtful prospect. But Italy was always proof that a country with big problems can somehow muddle through. That, despite high government debt and simmering government crises, it was trustworthy – for tourists and investors alike.

Now the eternally shaky candidate is wobbling. And once the unthinkable becomes thinkable – the national bankruptcy of Italy – then the truly big disaster is coming nearer: the end of the euro.

The donors have already rendered their verdict: they are pulling their capital out of many of the EU countries. The talk is of a “Wall Street assault” on the euro by the remorseless financial markets that, following Greece, Ireland, Portugal and Spain, are now “taking a bead on” Italy.

Smash the rating agencies

The talk is also of the big American banks that wanted to weaken the euro, to preserve the dominance of the greenback in the currency markets. There are also European politicians who are spreading this tale to the voters. “Look, we’re doing everything to save our currency – and it’s the speculators who are wrecking everything.”

This is only part of the truth, however. The other – often unspoken – is that, ironically, through their rescue manoeuvres, the countries of Europe are scaring off exactly those financiers that they need to save them.

On the evening of 5 July the rating agency Moody’s sent out a short message to their clients – banks, insurance companies and investment funds around the world. In the weeks preceding Moody’s had looked at the budget figures of Portugal and talked with government officials and central bankers. What the experts saw and heard failed to convince them. Portugal’s credit rating was downgraded.

As news agencies spread the message, investors all over the world immediately started selling off Portuguese bonds. The euro exchange rate nose-dived.

Straight away, EU Commissioner Viviane Reding promptly called for the major rating agencies to be smashed. Her colleague Michel Barnier now wants to prohibit the rating of debt for certain countries, and German Finance Minister Wolfgang Schäuble intends to investigate whether there was “abusive behaviour”.

European idea was “noble and somewhat admirable”

‘Europe stands up to the manipulations of the financial markets’: it’s a story that sells well to the public, and it’s being trotted out again today for Italy. It’s true, too, that Italian government debt may well be high – but unlike other countries, it’s not getting any higher. The banks are healthy, and private household finances are solid. So why are the markets panicking, and why now?

Hints can be found in the message from Moody’s. An important reason for the downgrade was “the increased likelihood that the participation of the private sector will be demanded” in the pay-out of new emergency loans. What worries the rating agency is what the German federal government, above all, is determined to push through: contributions by banks and insurance companies to finance the rescue package. Voluntarily, but if need be under the threat of coercion. That’s what Merkel and Schäuble have promised the Bundestag – and the unruly members of the coalition government.

And that’s the problem. Banks and insurance companies ultimately are paid for investing their clients’ money profitably. If losses loom, they must draw back. It played out that way in Greece and Ireland, and it’s playing out that way now in Portugal and Italy.

Led by the Germans, the Europeans have manoeuvred themselves into a strategic corner. Either they do without the short-term involvement of the big money houses and alienate their parliaments, or they stand up to Wall Street and risk massive capital flight. Either way, with each passing day the governments spend dithering, the uncertainty increases. Hence the crisis.

Forcing the private sector to participate is highly dangerous

Peter Demirali belongs among those who wrote off Europe long ago. The portfolio manager works for Cumberland Advisors in New York, an investment firm that manages more than 1.8 billion dollars for international investors. The European idea was “noble and somewhat admirable”, says Demirali. But the continent lacks the political foundation for a common currency. The euro? For him, it has no future.

It’s an argument often heard on Wall Street. And it’s to Wall Street, after all, that all global capital flows are directed. Although the eurozone as a whole has less debt than the U.S., the financial markets don’t trust European politicians to fix the problems.

John Taylor, a foreign exchange speculator, compares the common currency to a chicken that’s had its head chopped off and is still running around for a while, before falling over dead. Divided, hesitant, dithering: that’s how the investors see Europe, and that’s why they prefer to invest their money elsewhere.

There is one man who has long been sounding warnings of the inexorable logic of the markets: Jean-Claude Trichet, the head of the European Central Bank. For weeks he’s been touring the major cities with a message: forcing the private sector to participate is highly dangerous. It serves only superficially to protect the taxpayers, because in the end it will just drive the bill to the taxpayers higher. In an EU crisis meeting on Monday in Brussels, Trichet may put his objections on the record. That’s all he will achieve.

So goes Europe into the end-game of the euro, deeply divided. The bailout fund is to be expanded, possibly acquire more cash and new competencies, and the interest on soft loans should fall. More and more taboos are crumbling. But it is also clear that the Europeans can never come up with all the capital it needs to finance the indebted states. And that is why Europe needs precisely those financiers it is driving off.

4 July 2011 DIE ZEIT HAMBURG