Like Alpinistas roped together, an ever-reduced core of solvent states are supposed to carry the weight on an ever-widening group of insolvent states dangling beneath them. This lacks political credibility and may be tested to destruction if - as seems likely - Ireland is forced to ask for help. At which moment the chain-reaction begins in earnest, starting with Iberia.
It was a grave error for Germany’s Angela Merkel and France’s Nicolas Sarkozy to invoke the spectre of sovereign defaults and bondholder “haircuts” at this delicate juncture, ignoring warnings from ECB chief Jean-Claude Trichet that such talk would set off investor flight from high-debt states.Foreign creditors hold €2 trillion of debt securities issued by Greece, Ireland, Portugal and Spain. If Ireland goes, so goes Portugal, which is in even worse shape - and then Spain? At what point will the more solvent EU economies cut the rope?
EU leaders have since made a clumsy attempt to undo the damage, insisting that the policy shift would have “no impact whatsoever” on existing bonds. It would come into force only after mid-2013 under the new bail-out mechanism. Nobody is fooled by such a distinction.
Sadly for Ireland, events have snowballed out of control. Confidence has collapsed before Irish export industries - pharma, medical devices, IT, and backroom services - have had time to pull the country out of its tailspin.
Premier Brian Cowen - who presides over a budget deficit of 32 percent of GDP this year - still insists that no rescue is needed. “We have adequate funding right up until July,” he said. Mr Cowan must know this is not enough. Funding for Irish banks has evaporated, and with it funding for Irish firms.