One of the many flaws in the EFSF bailout mechanism is that it is funded by the very problem children that it is intended to save. A good way to think of the fund is to imagine California, New Jersey, Nevada, Illinois, Texas, New York and Pennsylvania coming together to create a bailout fund. Of course, several of these states are financial disasters. When a country applies for aid to the EFSF they no longer contribute to the fund. So what’s going on as the dominoes fall is that the fund is actually shrinking (via FT Alphaville):
… it now looks something like this:
Germany 119,390.07 France 89,657.45 Italy 78,784.72 Spain 52,352.51 Netherlands 25,143.58 Belgium 15,292.18 Greece 12,387.70 Austria 12,241.43 Portugal 11,035.38 Finland 7,905.20 Ireland 7,002.40 Slovakia 4,371.54 Slovenia 2,072.92 Luxembourg 1,101.39 Cyprus 863.09 Malta 398.44 Total 404,143.20
So you can see the sad math here. Italy and Spain are vitally important contributors to the fund. And ultimately, it’s Germany and France that are shouldering the majority of the burden here with almost half of the funding coming from those two countries alone. So we have failing austerity and no central treasury that can actually bailout the states. Ultimately, the markets are likely to continue attacking these countries as the austerity measures fail to lead to prosperity and in fact worsens the crisis across Europe.
All road lead to Spain. If Spain is required to tap the EFSF it’s likely that further action will be required from the core countries as they realize they are on the hook for essentially funding the periphery nations. What Europe has essentially done is not unlike a huge bluff. They’ve placed an impressive looking gun on the table hoping that it’s mere existence would deter further problems, but the market is slowly testing the bluffer’s resolve. Ultimately, because of its flawed construction the EFSF is more like a water pistol and certainly not the bazooka that many hoped it would be.
A true resolution will require tough decisions at some point. Only true unity or abandonment of the Euro from some periphery nations will lead to a sustainable situation. Because the single currency system (like all single currency systems) is inherently flawed it’s difficult to imagine a situation in which this leads to sustained prosperity for all involved. Much political will has been invested in this currency so its failure is not an option. What I fear most is that the citizenry will ultimately realize that this flawed system is simply not working. If the politicians do not take matters into their own hands via a true solution the populace surely will.