Monday, July 9, 2012

Apparently, in Europe, the Pain is Not Great Enough...Yet!

Monday morning and yields on Spanish and Italian bonds are rising once again to “unsustainable” levels.  The yield on Spanish ten-year bonds was around 7.10 percent and on Italian ten-year bonds was around 6.15 percent. 

There is a meeting of eurozone finance ministers Monday afternoon and the financial markets are expressing their pessimism that much will be accomplished.

This all comes after the euphoria over the European Union summit meeting that ended less than two weeks ago.

The problem?

National interests, of course. 

This has always been the stumbling block to any solution to the problems of the eurozone.

There was hope that the nations in the eurozone could focus on the issue of a banking union in the near term and, once they started working together on this, then the fiscal union could be accomplished.

But, national interests always stood in the background.

Wolfgang Münchau writes that the Summit agreement seemed to be in the right direction, but…

They agreed that there shall be no common bank recapitalization until a full banking union is established. And the Bundesbank has reminded us that the latter is not possible without a political union.”

But, Münchau continues…

What we know now is that Germany will not agree to mutualized deposit insurance. It cannot even agree to give the European Stability Mechanism a banking license so that it can leverage itself. If Germany cannot do the minimum necessary now, why should anybody think it can agree a political union?”
Germany, however, is not the only nation that is not giving in.  Even though the pain is great in several other nations, the reluctance to “give in” on certain special issues is great. 
As I wrote two weeks ago, some analysts have stated that the “game” that Germany is playing involves three paths, deflation, inflation, and writing checks.
To these analysts, “Germany has made a decision. They have opted for the first of the three: European deflation. The idea here is that the deflation would become so painful to the periphery nations that they would finally move to correct their situation.
In this picture, Germany perceives that the only way that the “periphery nations” will change the way they do business, a necessary condition for Germany to fully “buy-in” to the fiscal union, is for the pain in these periphery nations to become so great that they will finally commit to a major restructuring of their cultures. 
And, the stakes for Europe, at this time, are so high that Germany is willing to push events to the edge.  A “restructuring of cultures” is not something to be taken lightly.
If this German strategy is the “end game” then the question becomes one about the event or events that will precipitate the crisis that will result in the fiscal union.
If the yields on Spanish and Italian bonds become “unsustainable” the “final” crisis will arrive. 
Or, maybe the “final” crisis will be the second economic recession that has already begun. 
Or, maybe some “unknown” unknown will kick off the whole affair.
How much pain can Europe stand before something is done? 
One continues to think that each new cycle of pain will be the last one.  But, we are amazed at how much pain humans and human societies can absorb without changing their behavior. 
Apparently, we have not reached the limit of pain that Europe can absorb at the current time.  

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