The Unresolved Issues in Europe
The financial situation in Europe has not been resolved, regardless of what you may have heard. Now on top of the financial issues and with last weekend's elections in Greece and France the view of the people is now being broadcast and they are not happy. Regardless of how the problems in Europe get worked out, the issues in Europe are going to be with us for a long time. In case you were looking forward to a period of peace and decreased uncertainty you instead have the Chinese saying (or is it curse) - May you be born in interesting times.
The italics is the article and the bold is mine. From one of my favorite writers - Ambrose Evans-Pritchard at the UK Telegraph.
The immediate fate of Greece - and the euro - is in the hands of a boyish motorcycle Marxist. Syriza leader deal Alexis Tsipras has vowed to tear up the hated Memorandum, as the EU-IMF "troika" loan package is known.
He showed no sign of backing off as he met his country's president and began talks on the formation of an implausible Left front. "The popular verdict clearly renders the bailout null and void," he said.
To those who warn that such defiance means an unstoppable lurch towards full default, a banking crash and EMU expulsion, he retorts that Greece has the "ultimate weapon". It can bring down the whole European system if EU leaders refuse to soften the terms.
This bluff may be called. "Patience among the creditor countries is running out," said Blanka Kolenikova from IHS Global Insight. Germany's media says finance minister Wolfgang Schauble is itching to force Greece out of the euro as a salutary example, sure that Europe is strong enough to withstand the shock. This, in turn, is an illusion waiting to be punctured.
Arnaud Mares from Morgan Stanley said a Greek exit would set off "massive deposit flight" from all the vulnerable EMU states. "It could unravel the single currency altogether."
It is an dangerous moment for Europe and global markets. Greece has no functioning goverment. It must decide on a series of bond repayments, starting this week. Tough choices will not wait until fresh elections in June, should they occur.
The new bonds issued after private investors suffered a 75pc haircut in March are already trading at levels of extreme distress, with 21pc yields on 10-year debt. The EU deal to end all deals has collapsed after just two months.
The disastrous chain of events has essentially discredited the entire crisis policy imposed on Europe by Germany. Combined fiscal and moneary contraction has pushed much of southern Europe into a deflation "death spiral", pulling the rest of Europe down with a delay. Even The Netherlands is now in deep recessoin.
Revolt was inevitable. It has finally occured. The European Commission on Tuesday called for an immediate investment blitz to stop the downward slide. This follows hard on the heels of a call by European Central Bank chief Mario Draghi for a "growth compact". The EU insistutions are slipping out of Germany's control.
The election of François Hollande in France has radically altered Europe's balance of power, and popular fury has done the rest across a string of democracies.
There are signs that Italy may start to tuck in behind France, picking away at the EU Fiscal Compact. Silvio Berlusconi's People of Liberty party said it will not back treaty ratification unless it includes eurobonds and turns the ECB into a lender-of-last-resort. The party rebuked Italy's premier Mario Monti for behaving as "Germany's representative".
The party's abrupt shift follows an electoral rout over the weekend in North Italy, where anti-euro maverick Beppe Grillo won 20pc of the vote in Parma and 15pc in Genoa.
Mr Monti cannot push the treaty through without Mr Berlusconi's blessing. The carefully-crafted plans for ratification in Berlin and Rome on the same day are in tatters.
Mrs Merkel said she will embrace Mr Hollande with open arms but on policy substance she has carried on as if the insurrection never happened. "The fiscal pact is not negotiable," she said, insisting that EU treaties cannot be reopened once parliaments have begun to ratify. This is not true. The European Constitution was abanondoned after France and The Netherlands voted "No" in referendums in 2005.
Berlin hopes to assuage Paris with a beefed up role for the European Investment Bank and a growth compact, perhaps tacked on as an annexe to the fiscal treaty. Officals at the Kanzleramt think Mr Hollande's rhetoric was campaign hot air, and that he will switch tack like German Social Democrat Gerhard Schroder a decade ago once in office.
This may be a misjudgment, failing to catch the mood of fury in Europe. Mr Hollande was emphatic in his victory speech. "My mission is now to give Europe growth, jobs, prosperity and a future. We are not doomed to austerity," he said. They may call him "Flanby" in France after a brand of caramel pudding but his mildnesss disguises a steely side, and his Socialist base is not to be trifled with.
For Germany it is a moment of truth. Berlin has put off hard choices since the crisis began. It has refused eurobonds or budget transfers, stepping back from the Rubicon of fiscal union.
Mrs Merkel has insisted on austerity and reforms alone, imposing the full burden of adjustement on the weaker states. She has brushed aside arguments the EMU's crisis is in essence a North-South imbalance in trade and capital flows that cannot be corrected in this fashion within a currency union.
Her government has ignored warnings that simultaneous contraction in the whole of southern Europe - without offseting monetary stimulus or expansion in North Europe - can only lead to a replay of the Gold Standard errors of the early 1930s.
This phase of the crisis over. Now Germany itself will have to adjust.