The events of the last few weeks have shone a very harsh searchlight on the nature of sovereign debt within the European Monetary Union. Although critics of EMU have always argued that monetary union without fiscal union is “impossible”, it was only when Angela Merkel started to call for a procedure to handle a possible default on the sovereign debt of a member state that the markets began to focus on the fact that such a default really is possible. In substance, nothing much has changed with Mrs Merkel’s remarks: it always was possible for a sovereign state within the EMU to default. But now that the markets have realised that some key elements of “sovereignty” are missing from the EMU member states, market psychology has changed. It will be very hard to put this genie back into the bottle.