Fate of Europe 2013

armstrongeconomics.com / By Martin Armstrong / January 7th, 2013

The European Central Bank is taking a deep breath as its President Mario Draghi now turns his attention to desperately trying to nurse the Eurozone back to some stable economic health. The crisis management measures of the last three years have subsided for now as the ECB enters its first session this year on January 10^th, 2013. Draghi is hoping to extend the calm that has set in markets with his 2012 pledge to do anything in its power to end the crisis and that includes trying to keep interest rates unchanged for now. His threat of unlimited bond purchases has bought some time in this crisis for a pause as he hopes and prays that the Eurozone’s looming recession will subside. But as politics go, the fate of Europe insofar as bond holders are concern rests of not the claims of Dragji, but the political fortunes of Chancellor Angela Merkel who is highlighting Germany’s economic strength in the midst of the Eurozone chaos as she kicked off her campaigning Saturday for an important state vote that comes months before national elections. Merkel brushed aside worries about the weakness of her party’s coalition partner.

Human nature wallows in two traits (1) it resists change, and (2) it wants to believe tomorrow will be the same. Consequently, government bullshits the people all the time because that is want they want to hear as a rule – just tell me you will love me for the rest of your life, nothing will ever change, and we will live happily ever after! Hollywood has used that same formula to sell movies for decades. People do not like movies that are real. They want that happy ending. Some argue that Hollywood is responsible for the high divorce rate because they created false images of marriage and life.

Because of this inherent need for happily ever after, Draghi’s threat has been working so far as it typically does. Foreign investors have gradually returned back and Spain has been coping with the higher interest rates for now as they are at a 10-month low in Spanish borrowing costs. Nevertheless, Draghi and his European policy makers know there is no teeth behind their words and are uneasy that the turmoil which has emaciated the region’s bond markets could return because this is a political year and that means German politicians will effectively not do anything that could risk their election chances.

The ECB faces tremendous potential pitfalls arising from mounting debt in Spain, the parliamentary election in Italy, and the unsettling rise in the underground economy in Greece. European finance ministers are also assembling a rescue package for Cyprus, which will be the European Sovereign Debt Crisis’s 5th bailout.

Finance ministers are trying not to rattle markets as they now struggle with the possibility of writing off debt for Cyprus. The Eurozone ministers have pledged not to repeat a Greek debt write-off. However, the International Monetary Fund is pushing for more sustainable financing.

Cyprus has been negotiating with the European authorities and the IMF over another rescue financing scheme for Europe since June.

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