Europe: The single-currency grand bargain has to be re-made

For a decade Europe’s weaker sovereigns enjoyed the luxury of borrowing at rates within a few basis points of Germany. This seemed a fair bargain in return for giving up the flexibility to devalue their currencies in response to any economic or financial crisis. But now they have gone back to funding at the same wide spreads to Germany that prevailed before the single currency was introduced. Euro-denominated governments trade as a series of separate individual markets that investors can position themselves against any time that they judge spreads are not compensating for worrying credit fundamentals.

Investors know they can be bailed in and face loss of principal on European sovereign bonds. The bailout of Greece has established this. Meanwhile the European economies still suffer from an effective currency overvaluation against Germany, the continent’s most proficient exporter. They are losing both ways. The euro grand bargain must be...