Another Euro Crisis

We may all breath easier. The crisis is over. In Brussels yesterday the leaders of the 27 agreed to save Greece from the jaws of the bond market.

On the other hand the real Euro crisis is only just beginning. Germany has signalled its price for the Greek rescue: the EU must be able to expel errant members from the Eurozone. A way is sought to revoke the irrevocable union.

A new treaty will be needed and there is little appetite for that in European capitals. Still, Ms Merkel is pushing for it and the compromise language in the summit conclusions opens the door to treaty revision.

The root of the next euro crisis lies in the change made to the German constitution last year which requires a balanced budget. While Greece and Spain and Portugal are pushed to deflate their way to German levels of competitiveness, Germany will be deflating its way to a budget balance. That is why Germany wants to make an emergency exit available.

Until now we expected the borders of the Eurozone to extend to the east. It seems more likely that the southern border will retreat northwards.