A glimmer of hope?

The world has understandably reacted with horror to the news that even Germany is failing to sell its debt, after investors bid for only 60% of a government bond auction yesterday. But I think there's a faint glimmer of hope in the news.

The problem, as I see it, has always been that the euro zone is in the grip of a speculative crisis. There's nothing fundamentally disastrous about the big euro zone economies, but we are seeing a self-fulfilling panic where the declining price of euro zone debt is causing conservative holders of that debt to dump their holdings, further pushing the price down and causing more dumping.

What's needed in that sort of situation is not a new budget or prime minister, but a circuit-breaker: someone to come in and buy the debt no one else wants. After all, a lot of euro zone debt looks like a bargain at the moment: the interest rate premiums that owners will receive are in most cases at their highest since the creation of the euro, and in the case of countries like Italy, France, Austria and Belgium, there should be little reason to think the government is much less able to pay its bills.

The weak link, as I see it, is the ECB. It's let it be known that it's not prepared to fulfil that circuit-breaker role, and won't even cut interest rates to the levels of its counterparts in the US and UK. People fear that with the central bank demanding that the only way out of this crisis is through years of punishing austerity, some economies will gradually crumble till they really can't pay their debts, or even quit the euro altogether. Those fears are all rational reasons to drop euro zone debt, and they're all driven by the expectation that Europe's central bank has more or less gone insane.

The ECB's justification for this, laid out by governor Mario Draghi in a speech last week, is that governments, rather than the central bank, are the only ones who can restore confidence. Yes, Spain has enacted the most painful cuts in its democratic history and is suffering 20% unemployment, but it still needs more austerity; eventually, investors will start trusting it again. Look at Germany, they say: it's not having any problems.

In that context, I think the failure of the German debt auction should serve as a salutary wake-up call. The proposition that the problem will be solved once peripheral economies become more like Germany only works if at least Germany is doing OK. If, on the other hand, investors fear that the ECB is allowing a run on euro zone debt and driving Europe into a continent-wide recession, you don't even want gold-plated German debt.

It still seems a big ask for the ECB to completely reverse its direction on this. To do so would be an enormous mea culpa: more likely is Martin Wolf's prediction that "the ECB risks being remembered as the magnificently orthodox central bank of a failed currency union". But if this failed auction wakes the ECB up to the fact they're on the wrong track, then it represents a faint glimmer of hope amidst the gloom.