The eurozone crisis is back

Stock markets are crashing. Bond yields are soaring. And the cryptos are evaporating. There is so much going on in the financial markets right now it would be hard to miss the most significant event. The eurozone crisis, which almost broke apart the single currency back in 2011 and 2012, is back. And this time around, there is no very obvious way of fixing it.

With inflation soaring across the world, the era of plentiful printed money coming to an end and interest rates starting to rise, every kind of financial market is in turmoil. Investors are adjusting to a new set of circumstances, and doing so very quickly. So far, only a few traders who spend their days glued to Bloomberg terminals have paid very much attention. But, within the chaos, yields on peripheral sovereign debt, the trigger for the single currency’s meltdown a decade ago, are rising steeply again.

At the start of this year, the yield on a ten year Italian bond was just 1.25 per cent. Now it stands at 4.04 per cent and is going up every day. Just last week it was only at 3.3 per cent, a dramatic increase by the standards of the bond market. The yield has already climbed to its highest level in years and is accelerating towards the 6.7 per cent it reached at the height of the last crisis when there were widespread fears Italy would default. Likewise, the yield on a ten year Greek debt has doubled over the past few weeks, punching through 4.4 per cent, and getting dangerously close to the levels that came close to forcing the country out of the currency zone.

The trouble is, rising interest rates make all that debt a lot more expensive to service. And these, let's remember, are some of the most heavily indebted countries in the world, and they owe a lot more than the last time around. Italy’s debt to GDP ratio has risen to an alarming 148 per cent of GDP, and Greece’s to 186 per cent.

It is exactly the same challenge as a decade ago, except this time on roller skates. And, perhaps most worrying of all, the European Central Bank (ECB) has no real way of fixing it. At the height of the last crisis, its then president Mario Draghi, who now happens to be Prime Minister of Italy, pushed all the treaties to one side and started printing money. That meant he could buy all the bonds the peripheral countries issued and bring the markets to heel. But this time? It is not so simple. The ECB can’t print money without stoking inflation. But if it doesn’t print extra euros, it may have to admit that Italy and Greece, and perhaps France as well, come to think of it, are bust. In reality, the euro remains as dysfunctional a monetary system as ever - and inflation, a first for the currency, is about to test it to the limit.