More European jitters– focused on European banks– sent stock markets around the world swooning last week. So of course Merkel and Sarkozy met and rumors circulated about this plan or that.
This is becoming a tiresome pattern. Well-justified angst about the fiscal straits of the PIIGS, and the consequences that defaults would have for European banks and the Eurozone leads to crisis meetings. Some plan is extemporized, and announced with great fanfare. For a while, investors say 'I believe!' 'I believe!' and the market comes to life, like Tinker Bell, in Europe’s version of the confidence fairy. But then reality reasserts itself. People realize that short of socialization or monetization of debts, the risk of default is not going away. And even under those two alternatives the problems are just transformed, not banished.
So each successive Tinker Bell rally becomes weaker than the one before, and each successive reversal become more bone jarring. I don’t believe, and I won’t believe. Indeed, the yawning gap between the nature and scope of the problem, and the proposed palliatives (short sale bans, securities transaction taxes) should reinforce one’s understanding of how childlike 'I believe!' really is.
The choice is ultimately Germany’s, and it is being pressed feverishly by France. Saving the Eurodream will require Germans to go against their deeply ingrained instincts. But historical scars of more recent origin than Weimar makes them petrified that by saying nein! they will be condemned for destroying Europe for a third time in a century.
In the end, I agree that the latter fear will overcome the former: Regardless, theirs is a choice between fears–neuroses, perhaps. But agreeing to shoulder a disproportionate share of the debt burden to save Europe will expose Germany to financial gangrene.