The European crisis repeats the same pattern endlessly. Bad news sinks markets, ultimately accelerating into a panicky wave of liquidation. European leaders convene, deliberate and emerge with what they say is a "fix." Markets leap in joy, until investors gradually read the small print and discover that the fix is a fudge and the core problems remain. Then the bad news starts up again and the markets sink. Repeat. Endlessly.
That seems to be Europe's core strategy for coping with the greatest challenge since World War II. This week we see the cycle at work again. The latest miracle fix-a handover to technocratic governments in Italy and Greece-is looking shopworn and shoddy already. Meanwhile, there's bad news from Spain and Portugal, where despite the most-solemn promises to undertake the most-sweeping reforms, and the blessings of Brussels, the economies are somehow failing to grow. Add disappointing news on Italian bond yields, and Europe has resumed its grim slide.
The underlying problem remains: Germany and France are locked into their most bitter struggle since the panzers exploded out of the Ardennes Forest in 1940. Money is one big component of the fight. The French bottom line is that Germany must help raise the carcass of the French banking system from the dead. Clueless European regulators (who accomplished the not insignificant feat of making America's dysfunctional regulatory system look Solomonic) pushed many banks to invest in soon-to-be-worthless sovereign debt from soft euro countries like Spain, Italy and Greece. So French banks in particular are loaded to the gunwales with bonds that won't float.
Worse, the French corporate elite decided in its sleek official way that this was the right time to go long on Italy, buying banks, companies, stocks and bonds in the most disastrous French intervention on the peninsula since King Francis I lost the battle of Pavia in 1545.
Obviously, argue the French, Germany must pay for this. With immaculate Gallic logic they can demonstrate that if France is stuck with the costs of its folly, it will lose its AAA credit rating. That in turn will make the European Financial Stability Fund (EFSF) a dead instrument, exposing Europe and Germany to the full unmitigated force of the financial storm.
The French position seems to be to wait patiently for their slow-witted Teutonic neighbors to puzzle their way to an understanding of the clarity of French reason. At that point, the Germans are supposed to capitulate, authorize the European Central Bank (ECB) either directly or indirectly to print masses of money, and the proceeds will go to save the French banking system and national elite-without anything so humiliating as a bailout ever being mentioned.
