Europe’s Options

After requesting, and obtaining, the heads of the three Prime Ministers of Greece, Italy, and Spain, the markets do not appear at all satisfied with the simple notion of change. As we discussed last week, the cure that would have done the trick a few months ago, is now treated as ‘probably too little, certainly very late.’

What is happening now is that the markets will continue to test the new weak link, with France in the sights of the markets because of the exposure of its banks, until, probably a minute before it is too late—if we are lucky—mighty Angela Merkel will save the day.

There are essentially three scenarios ahead of us. The best case scenario is that possibly through a joint intervention of the IMF (led by an experienced French lady…), Mario Draghi will get Merkel’s green light to effectively become the banker of last resort to the troubled European states. This may happen either, as we discussed previously, through a clear statement that the ECB will do all it takes to keep a lid of yields, just like the SNB has effectively done with the Swiss Franc, or via an intervention of the IMF co-financed or co sponsored by the ECB, or by Germany agreeing to the ‘euro-bond.’ It is unlikely at this late stage that anything other than clear, concerted action with the clear backing of Germany will work.

The second possible scenario entails the breakup of Germany, and possibly the other strong euro members, from the Euro. This would leave the euro as a weaker common currency shared by the eastern and club med countries of Europe.

The final scenario, probably the most disruptive, is a complete breakup of the euro, which could be triggered by Spain, Italy, or even France.

Both latter scenarios would be caused by Germany being too scared, for historical reasons, to take the political lead of the continent, which is what would effectively happen if it became the main lender of last resort, or the underwriter of the euro bonds. Leaders sometime have to take tough decisions, and Germany is too worried of the negative sentiment that could be engendered by it starting to effectively dominate the continent again, this time through its Teutonic credit rating, rather than by its military might.