Eurozone: Santa Claus Is Coming To Town

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by: Carlos X. Alexandre

European treaty changes are all the rage, with Angela Merkel, Germany’s Chancellor, and Nicholas Sarkozy, France’s President, leading the charge that ultimately calls for the surrender of sovereignty in some form. As a reminder, the Lisbon Treaty took eight years to ratify, as reported by the BBC.

Like the proposed European constitution before it, the treaty is often described as an attempt to streamline EU institutions to make the enlarged bloc of 27 states function better.

To bring up the idea that a modification to existing treaties will be some kind of medicine for the pressing debt issues, is preposterous at best. Yet, both Germany and France are pushing for changes to “allow closer monitoring of euro countries’ budgets,” as reported by Bloomberg, and the best excerpt within the report came from Sarkozy.

“There can’t be a single currency without economies heading toward more convergence,” Sarkozy told 5,000 supporters in a 50-minute speech in the Mediterranean port. “If living standards, productivity, and competitiveness gaps widen among euro-zone countries, the euro will sooner rather than later be too strong for some and too weak for others, and the euro zone will explode.”

Really? The “too strong for some and too weak for others” was part of the argument against the euro when the politically driven currency architects were hard at work on the master concept. In addition, and during the same speech, Mr. Sarkozy also stated that “No Eurozone Country Will Go Into Default,” as reported by Dow Jones. I worry when politicians are so adamant about anything, because it always turns out to be wrong.

By contrast, and assuming that politicians around the world have access to certain information that none of us has, The Hill reported that “conservatives say they will try to block the International Monetary Fund from bailing out Italy and Spain, which they say could leave U.S. taxpayers with a huge bill.” Well, we know that ultimately something will be done, and the feeling is that the President will veto the legislation, but the writing is one the wall, and for Sen. Tom Coburn to state that “Europe is going to default eventually,” is a clear indication that everyone understands the end game – left and right.

Meanwhile, Angela Merkel is still opposed to European bonds, and her focus is on regaining credibility by assuring investors that going forward all members of the eurozone will be fiscally responsible. That’s wonderful, but it doesn't’ change the fact that investors will vote with their feet when their current holdings face insurmountable risks.

Thus, as we approach the 11th hour, China and the IMF are once again in the news. On the Chinese front the message could not be clearer, and that puts the never dying rumor “China Saves Europe” to rest, as reported by Reuters.

Europe cannot expect China to use a big portion of its $3.2 trillion foreign exchange reserves to rescue indebted nations, a top Chinese foreign ministry official said on Friday, Beijing's strongest rebuttal yet to suggestions it should bail out the euro zone.

The logic is actually pretty simple, not to mention that the foreign reserves will come in handy for domestic needs a lot sooner than we anticipate. According to the report, two-thirds of the reserves are literally stuck in dollar assets, and they can't sell the dollar because it's not convenient – although they will have to sell some at some point, and that will unleash the third act of this global script. But the IMF is also in play, and according to Bloomberg, “Euro Central Banks May Provide $270B via IMF.”

A European proposal to channel central bank loans through the International Monetary Fund may deliver as much as 200 billion euros ($270 billion) to fight the debt crisis, two people familiar with the negotiations said.

Channelling is a nice way to circumvent the law, but let’s not get our hopes up because “no fewer than four ‘comprehensive’ rescue packages over 19 months have failed to arrest the crisis,” and I’m running out of comprehension. On Friday, Charles Plosser, the president of the Philadelphia Federal Reserve, said that “central banks and monetary policy are not real solutions to the European sovereign debt crisis or the massive U.S. fiscal deficit,” according to MarketWatch. He’s actually correct because if central banks were the solution, life would be very simple: You spend, I print.

On Thursday, December 8, the European Central Bank should raise rates if the institution is to stick to its playbook because inflation is still stubbornly high at 3%. But it won’t, and may actually lower them below the sacred 1% mark, and if that is the case, risk with a capital “R” is back on the table. But Santa Claus, or Saint Tim, is coming to town, as reported by MarketWatch.

The trip will begin with meetings Tuesday with European Central Bank President Mario Draghi and Bundesbank President Jens Weidmann followed by talks with German Finance Minister Wolfgang Schauble. On Wednesday, Geithner will travel to France to meet French President Nicolas Sarkozy and Finance Minister Francois Baroin. He will then travel to Marseille to meet Spain's Prime Minister-elect Mariano Rajoy Brey. The trip will end Thursday with talks in Milan with Italian Prime Minister Mario Monti.

I hope the reindeer are well rested for this demanding trip and I only wish I could take a peek into the bag. But when we’re looking for solutions delivered by politicians, we’re usually looking for love in all the wrong places.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.