For Britain to be locked in austerity with Germany is no way to recover from a credit crunch
Italian bond rates are on the way up again. Spanish bonds are following in their wake. Among the credit rating agencies, Moody's says the eurozone deal last week was weak and added little to previous emergency summits. In its opinion, the eurocrats gathered for a lengthy chat and neglected to give any details for future action. Standard & Poor's is expected to strip France of its AAA status any day.
The market remains uneasy and for good reason. As my colleague Larry Elliott has already described, the EU is huddling closer together against the chill winds blowing from the debt markets with only a T-shirt and shorts for cover.
They need to buy themselves some winter warmers, but all the spare money in the kitty is going to pay debt.
It is a situation that calls for a war analogy and, as you might expect, war analogies are everywhere. Mostly, they relate to the second world war and the need for solidarity among European nations.
But the more accurate reference point is the first world war because the German solution to the problem is to impose a "reverse Versailles". Everyone that owes money after the war (or in this case credit crunch) must repay in full (please ignore in Athens). Failure to put in place measures to restrict spending will be met with … a punishment of some kind … possibly ejection from the eurozone, who knows? So far, President Sarkozy and Chancellor Merkel have used exclusion from the inner circle as the chief threat.
The imposition of debt repayments by Berlin is reminiscent of the post-first world war Versailles treaty that demanded Germany repay its debts to France, Britain, Belgium, etc.
As the German economic historian Albrecht Ritschl argues, Germany repaid very little of its reparations bill, and what it did pay was borrowed from the Americans. It is a strange irony, that here we are, 90 years later, repeating the same mistake, only now it is history's victim that is pursuing the misguided policy.
Of course, borrowing to achieve hyperinflation, as the Germans did in the 1920s, is a bad move.
However, today is not then and borrowing today is unlikely to trigger even a few percentage points of inflation, let alone hyperinflation. By the end of next year most European nations could be begging for a bit of inflation just to keep people spending (the theory being that people put off spending when prices are falling to benefit from lower prices in the future).
Worse, austerity will kill growth, as Standard Chartered Bank's chief economist Gerard Lyons powerfully points out today in his analysis of Britain and the eurozone. He says both will fall back into recession next year, with the eurozone faring worse than the UK.
To be locked in an austerity pact with the Germans is no way to recover from a credit crunch; it simply makes the situation worse and breeds resentment in the worst-hit countries. No wonder Robin Niblett, director of the foreign relations thinktank Chatham House, argues that the euro austerity pact is a recipe for civil unrest, mostly driven by far-right groups representing the disaffected working classes who will take the brunt of spending cuts.
If Versailles played a part in the rise of extremist groups, why follow the same path again?
David Cameron chose to bat for the City and finance industry when he wielded his veto last week. It could be he reached the right conclusion (using the veto) for the wrong reasons. Who in their right mind would want to support another Versailles treaty?