There has been a lot of sparring coming out of the recent European Summit that was supposed to produce, for the fifth time, a comprehensive solution to the Euro crisis.
These disagreements have disturbed financial markets and made it all the more likely that there will be a market panic in the next few months.
That panic would force leaders to finally back up their words with the money necessary to restore stability, or face quite dire consequences.
I continue to think there is about a three in four chance that the leaders will eventually stare reality in the face and do what is necessary, but that still leaves a worrisome one in four possibility of a disaster that would spread across the globe.
The most important fight in the near-term is the one that is being conducted most subtly.
The European Central Bank needs to be prepared to buy massive quantities of Italian and Spanish bonds if those nations are threatened with loss of access to private funding at acceptable rates.
But the ECB and Germany, Europe’s major power, do not want the central bank to step up purchases if there is any serious risk that the financial support would allow politicians in the troubled countries to backslide on necessary reforms.
The hope was that the medium- and long-term reforms agreed to at last week’s summit might provide the necessary reassurance to the ECB.
However, it is becoming clear that the central bank viewed the steps as progress, but not nearly enough to justify a major step-up in ECB bond purchases, despite subtle encouragement from many European leaders.
That is a major reason why financial markets have reacted fairly negatively. Unfortunately, this struggle probably will not be resolved without a market crisis leading to a more definitive summit.
The more public struggle is about the role of the UK, which is one of the 27 countries in the European Union, but not one of the 17 that uses the euro as its currency.
There are two levels to that fight.
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