Is Europe beyond saving?

If you’re an investor, you might want to keep your eyes shut, the sound down and the curtains closed for the next week. On Friday evening (European time), Standard & Poor’s announced it was downgrading France — its bonds were bumped down a notch from the top AAA rating to a mere AA+. France was not alone, Austria too lost its AAA — though Germany and the Netherlands kept theirs — while Spain and Italy (already lower rated) were further downgraded. As Wolfgang Münchau writes in the Financial Times, this is effectively S&P drawing the line for where it expects the Eurozone to break up. Stronger northern European countries will go it alone, while those south of the debt line will be left to fend for themselves. 

The only solution now, according to Münchau, is a federal Europe — the ability to tax across borders, transferring wealth from the prosperous to bail out the feckless and over-indulgent. Unsurprisingly, there is not much enthusiasm for this approach in Germany, which is effectively the driving force for reform in Europe today. And so, the end game approaches — an official Greek default now looks imminent, probably forcing it out of the Eurozone. And that will start a vicious cycle of further downgrades, and potentially other battered economies falling over — or stronger ones simply cutting them adrift. The bottom line: in Münchau’s estimation, there are no more credible options left for policymakers to save Europe. The game is up.