To be honest, that showdown has been looming over Europe for quite some time.  It is simply that the situation gets steadily worse and the foundations for some sort of compromise just seem to become more distant all the time.  This latest of a series of frustrating summits ended the same way that all the rest of them have.  The two sides of the issue came with the same positions they have been taking for the better part of five years and hoped that something would make the other side capitulate.

On one side are the nations that are in dire financial straits. They need money and lots of it. They want the richer nations in the Eurozone to provide that money and in sufficient quantities to get them off the hook when it comes to their current political and budgetary crisis.  The nations with the cash have no desire to do any such thing unless and until there is some assurance that the budget mess is cleaned up and the situation never gets repeated.  The financially strapped states have all engaged in some form of austerity effort and in the case of Greece and Spain the decisions have been pretty harsh. The populations of these nations are on the edge of rebellion and it has been hoped that the richer states will accept that these countries lack the ability to go any further or faster.

To some degree that is exactly the position that the rich states have taken as they are not really demanding a more accelerated pace of austerity (but no slowdown either). The crux of their argument is that these states must agree to some kind of long term plan that lowers their debt and deficit and they are further demanding that the system have some enforcement teeth.  The fact is that all of these states are in violation of EU rules on debt and deficit already but there is really nothing that can be done other than to accuse these states of profligacy and remind them that they are in violation. They can be fined but that seems utterly ridiculous at the moment given that these governments are surviving on loans and handouts. It seems a little less than productive to fine a nation when you are the one who will be paying the fine.

Analysis: This has become a contest of wills and it is not clear what will break first. It all comes to political considerations as much as economic ones. In every nation that has faced an election while pursuing a policy of austerity the incumbent has lost. The victors have all been politically to the left and they are generally refusing to play by the rules set by the Eurozone, the EU, the ECB or the IMF. They have all but dared the other states to take more aggressive steps when they know that there are none available. The nations fed up with austerity now have an ally in France as the new President has become an ardent opponent of the German position.

The Germans might be persuaded to back off except for the political situation in that nation.  Elections are coming up next year and right now Angela Merkel has a pretty impressive lead in the polls.  That could evaporate in a heartbeat if she changes her tune on German support for these indebted nations.

Courtesy:  Dr. Chris Kuehl, Armada Corporate Intelligence – Dr. Chris Kuehl is a contributing editor at BIIA