Play nicely now

Speculators can make a fortune by making the highly likely become inevitable. In 1992, George Soros made one billion pounds by pushing the UK out of a fixed exchange rate it was not willing to maintain. Investors betting that the euro will break up may want to repeat the Soros accomplishment.

The path is simple. First, they take advantage of their power to reduce any heavily indebted euro zone country to insolvency by increasing rates and refusing to renew loans. Countries then default and the European Central Bank and European monetary union fall under the strain. But only Greece has buckled, and a weak tax system meant it was almost certainly heading to insolvency anyway. Everyone else is showing more political will than sceptics anticipated. No government has wavered in its commitment to holding the euro together in a fiscally sound way and the European Central Bank has done what was required to keep the pressure bearable.

Many investors have been surprised by this resilience. But they should have studied the decades of snail-like progress towards full European Union. The leaders of these nations have always left it to the last minute to do no more than was just enough. The new element of the current crisis is not the frustrating behaviour of the authorities but investors’ bleak interpretation of every development. The news during the last week has followed the same trajectory, but the market’s interpretation has been different — and more optimistic. Bond yields have started to fall. Equities have risen. Even a threatened mass downgrade from Standard & Poor’s did not have much effect.

What has changed? Investors will say that the political commitment to the euro finally looks credible. That is a face saving way of saying, “We read the situation wrong”. But perhaps investors have also realised that breaking the euro was not like breaking a single currency peg. If their ever-escalating demands for austerity and fiscal union lead to a chaotic dissolution of the currency of the world’s second largest economy, they will be held responsible for wrecking the global economy. Better, perhaps, to give governments the benefit of the doubt.