In the chain of Europe’s sovereign debt contagion the biggest domino of all is teetering. Twice in a week, Rome’s 10-year cost of credit has broken through the 7 per cent mark. Should debt markets close the door on Italy altogether, the euro would be in lethal danger.
It is understandable that those calling for a “big bazooka” are baying louder. They want the European Central Bank to throw away the fig leaf for its bond purchase programme (which it calls a temporary fix of the monetary transmission process) and expose as much of its balance sheet to the sovereign debt market as it takes to keep bond prices up for good.
No matter how big the bazooka, a policy of shooting first and asking questions later is rarely wise. In a sense, of course, only the central bank has enough firepower definitively to end the run on eurozone sovereign debt. This is why the Financial Times has accepted the need for bond buying in extremis. Yet even Frankfurt’s inexhaustible fount of liquidity will not put out the crisis in the absence of a political agreement that the ECB cannot provide, and which it may even undermine.