Sunday, July 31, 2011

Can't things just stay calm for a few days while our new baby is born?

All ready to write my part 3 to see what's in store for Italy and the Euro in the future, when I stop for a couple weeks to welcome my new baby. All that's happened since then is:

- Italy's politicians coming together to quickly pass an austerity budget to pacify the debt markets. That almost none of the cuts kick in for two years apparently didn't bother the markets too much: the interest rate Italy's being charged for new loans fell a couple points after it passed. They were probably amazed by the lack of the usual drama and disfunctionality in Italian politics.

- The EU puts together a bigger bailout than expected for Greece, with about 20% of the savings coming from the banks holding Greek debt taking losses- also a surprise development. European debt markets in general take a breather. So attention naturally turns to...

-The circus in the U.S. congress. I don't even want to get into this ridiculousness for the moment. I will make these brief instigations though:
Fact- America's fiscal policy will take a sharp change in direction due to the Republican's stunt. Obama and the democrats showed no inclination to make the kind of cuts in this budget only a few months ago.
Opinion- Does that mean Boehner won? The republicans got much of what they wanted. but America also saw that Tea Party members were willing to inflict a potentially devastating blow to America, just to get its way.
Curiosity- Where have all the republican presidential hopes been during all this mess? I'm not living in America so I admit I might miss something, but how is it one of those guys isn't saying, "Look at all these idiots!" and then finding a more common sense plan to rally an obviously dissatisfied electorate.

-Then just when nobody was looking, Spain and Italy start to get pounded again in the debt markets, and Spain's unpopular government announces elections in a few months.

The new Greek bailout was larger than expected, but nobody thinks Greece is past its problems yet. The Economist actually quoted a higher-up at Deutsche Bank as saying that "at least Greece has a fighting chance" of not needing another (3rd) bailout. How's that for confidence? But what has inspired some confidence was the new mechanism set up by the EU designed to automatically provide financial support to Greece, Ireland, or Portugal if needed. The EU is finally giving a pretty explicit guarantee that at least these little guys won't go bust. Problem is this mechanism is way to small to be able to save Italy or Spain should they go bust. It's entirely up in the air if the EU can/would save either of those countries if things turn south.

So from what I've seen, both the people who support the bailouts and those who hate the bailouts agree there are only two final solutions in sight here. One: disaster leads to a country having to leave the Euro, or perhaps even the entire Euro dissolving. Two: the Euro countries further integrate and have a united fiscal policy. This could mean the creation of "Eurobonds"- basically Germany and the other "good" countries co-signing the same way parents help their kids borrow money for a new car. The kid pays, but if he can't Mama Germany and Uncle France will have to cover it. This is a legally explicit financial guarantee, a symbolic step the Northern European countries wanted to avoid. It could very well mean austerity in countries like France if this keeps up.

Europe looks likely to circle the wagons for now, and this financial integration may well happen. But the Euro will shake with every domestic election that brings an anti-EU party into government, as happened already in Finland recently. It seems the Euro is going to be under serious threat for quite some time to come.

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