You can't just carry on as if nothing happened

There's no living with a killing, said Shane. There's no way to put Humpty Dumpty back together after he's turned into an omelette, as the King's horses and the King's men all found out. And there is absolutely no way that Europe can return to those halcyon ways when investors behaved as though neither default or departure from the euro was possible. Not unless the structure is changed to make it impossible.

Mario Monti is promising the sort of austerity that you would expect from a [roper eurocrat. Merkozy are set to get us closer to more rules and treaty changes, which they hope will help restore confidence and Draghi seems, to me anyway, closer to 'doing his bit' to make sure the ECB beefs up its crisis-response.

But I just don't think the euro can be batched up with fine-tuning of the current structure. We are going to go on seeing slow growth and go on seeing poor budget numbers, not to mention cash-strained households and banks. Confidence-building in peripheral government debt may improve a bit, but will ebb and wane. And at some point, it'll wane enough to put us right back in the mire.

What is needed is a plan that gets us to a very clear destination: A Eurobond, for a core group of countries which can and want to live with sufficiently co-ordinated fiscal policies and rules to make a Eurobond sustainable. Agree that is where we are going, agree the rules, create a precursor to a Euro bond, and get the ECB to bankroll the transition. Who is 'in'? Dunno, don't care yet. But saving the system, and then debating who is 'in' is a million times less awful than just letting it collapse because you aren't willing to recognise the need to move on from a system which may always have been flawed, but certainly is now.

Save me from ratings agencies

I was on my way to the pub when Fitch saw fit to downgrade Italy last night. I wondered whether I should talk to a few people about it, but since all Fitch are doing, is playing catch-up with cuts already made by S&P and Moody's, I didn't bother.

Markets did react, though the rating cut was more catalyst than cause. But it is a reminder of the continuing influence of organisations which were discredited in the first part of the credit crisis.

It isn't the decision to downgrade Italy (or any other European country) that bothers me. I would have thought that one of the definitional features of a 'sovereign borrower' should be it's ability to print it's own money to repay it's debt. And that is something the Euro Zone countries have given away, making every single one of them less creditworthy than the UK. Yes, even mighty Germany.

What annoys me, is that with three rating agencies each adjusting ratings and 'outlooks' as well as putting countries on credit watch, we have a steady stream of bad news for any country whose credit is under pressure, which exacerbates the market reaction. It's nonsense, made even more nonsensical by the way that bank regulation forces everyone to pay undue attention to the ratings.

Anyway, the rating focus shifts to Hungary next week, as the 'raters' come calling. Personally, if they came to my door, I'd send them packing.

crisis - what crisis?

The Mardle joins the Dart at Buckfastleigh and when I'm in Devon, I can watch it from my window as I write. It's a better place to think than Marseille, where the G7 achieved nothing a week ago, or Wroclaw, where Europe's Finance Ministers don't seem to have achieved any more as they wrestle with the European sovereign debt crisis.

If leaders find themselves unable to lead, the least they can do is shut up and keep out of the way. Markets want Europe's leaders to produce a rabbit from a hat and make the crisis go away, and are disappointed when they find that no rabbit materialises. As much as finding a solution, the leaders need to manage expectations until no-one expects a quick fix. But that having been said  -what happens next?

If you assume that there is no appetite either to abandon the euro, or to accelerate creative destruction by hastening Greek default, there are a number of steps that are pretty much inevitable from here. The first is that we will see a battle between the Barroso camp - in favour of Euro-bonds and much closer fiscal integration - and the German camp which knows it cannot deliver that to the German voter. The second is that we will see further attempts to ensure that inadequate liquidity is not what undoes Europe. The move to  expand provision of dollar liquidity through year's end is part of that, and further measures are possible. The ECB really doesn't want to make money cheaper, and the German political elite doesn't want to take on the fiscal burden of the weaker economies, but all agree that blockages in the global flow of money are lethal and should be removed. Thirdly, there will be more moves to re-capitalise Europe's banks, in order to weather-proof them against Greek default. The banks may shout they are adequately capitalised already, and face limited losses anyway, but this is a crisis of confidence. After the excesses of the past, banks are inevitably gong to face excessive regulation, need excess capital and have to adjust their business models accordingly.

With all that will the euro survive? Probably. The euro needs bolstering so that can withstand the default of a member nation. likewise the banking system needs to be able to withstand sovereign default. The tools to do so are available to the ECB and the politicians. I just wish they'd stop going away for crisis talks from which they emerge with no suggestions at all about what to do.