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One is tempted to say that the European Debt Crisis is over

Updated on September 23, 2012

Economist Front Page

Tempted Angela?
Tempted Angela?

The Economist front page is a contrarian indicator

The Economist may be sending a classic contrarian signal when its front page runs the story that Angela Merkel is tempted to wreck European Political and Economic Union. This scenario by default must be discounted in the financial markets. If it happens or does not happen, the prices should go up. There is actually more evidence that the European Crisis is being resolved in the absence of German leadership. Germany must then decide by referendum if wishes to participate or not.

Angela Merkel has stayed out of the domestic political debate in Germany, until the outcome is clearer. Her proxy has been made by various cabinet ministers and advisers; like Kurt Lauk and Guido Westerwelle. They have opined the wisdom and imperativeness of political and fiscal union.

Mario Draghi has also been mindful to avoid compromising Merkel's domestic position over her involvement in a European bailout. He has been careful to insist upon conditions for ECB intervention that support the position of Germany on the subjcet.

The conditions mandate a specific level of austerity in return for emergency funding; that will trigger a formal request for a bailout from the EU by the indebted nations concerned. The Spanish Government is complying; by moving the debts of the regions onto its balance sheet so that the mandatory formal request is triggered. The application of these conditions avoids the domestic political process within the indebted countries; that brings with it the kind of risks seen in the negotiations with Greece.


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