Conventional wisdom is always right… right up to the moment it is proven wrong. The prevailing conventional wisdom of policy makers and the business media has been that the debt crisis in Europe is very serious but is manageable and can be contained.
The logic underlying this belief is that by enacting steep austerity measures and raising imposing "Firewall Funds" that enough time will be bought until eurozone nations work through their individual recessions and return to a growth mode. Once that happens, the smart set says, the crises will be defused, economic stability will return and all that new debt will be repaid.
Good luck with that.
See, up until a week ago the euro crisis had pretty much stayed a financial one. But now, it is a full blown political one. Within the space of a few weeks everything has changed and that should make you and everyone who is paying attention very nervous.
For the last year all the focus has been on the financial metric du jour. One week it was bank stress tests, the next it was sovereign bond yields and another it was widening CDS spreads. Then we all breathed a quick sigh of relief when the ECB showed some creativity in announcing their Long Term Refinancing Option but we also gasped just a bit at how much was taken down by the continents banks.
During this time policy makers and international bankers told us that this course of action was good. That there was no need for the markets to be afraid. That cooler heads are prevailing. That more debt will actually will actually solve a solvency crisis.
Then in March we watched with a mixture of curiosity and an "it sucks to be them" detachment as Greece underwent an orderly default. Greece is small and ultimately inconsequential we were told. We were assured that austerity was good and that while Greece was in for some hard times in the short run in the long term the Greek people would be glad they endured the pain of austerity.
But on April 4th, when Dimitris Christoulas, a 77 year old pensioner put a bullet through his head in a park across the street from the Greek Parliament because "he couldn't eat garbage," curiosity and detachment turned to dismay. Nothing puts a bad face on a poor policy like a terrible human tragedy.
Less than three weeks later, French President Sarkozy looks like he and the Misses are heading for a shot on 'Dancing with the Stars' as Socialist and anti-austerity candidate Francois Hollande appears ready to take Sarkozy's place in the Palais de l'Élysée on May 6th.
Topping it off earlier this week, the pro-austerity coalition government of Netherlands Prime Minister Mark Rutte collapsed amid disagreement on how to reduce spending to meet "allowable" deficit spending targets of 3% of GDP. A caretaker government is now in place and new elections have been called for this coming September.
If as expected Sarkozy loses on May 6th and The Netherlands is no longer governed by a pro-austerity coalition then the political calculus will have changed dramatically and German Chancellor Angela Merkel will essentially be alone on the pro-austerity side of the aisle. While Germany is strong, it is not strong enough to carry the entire continent.
So what does this mean for the euro (FXE)? Two things;
First, it means that the fate of the euro is no longer in the hands of policy makers and international bankers. It is in the hands of a voting public who are being asked to make sacrifices by well-coiffed international bankers speaking from posh resorts.
Second, it also means that the problems of the periphery - Greece, Ireland and Portugal - have now spread to the core of the euro's strength - The Netherlands, Spain, France and even Germany where both consumer spending and sentiment reportedly slowed this month.
The crisis is therefore entering a dangerous inflection point. From here on in every election in every corner of the continent - be it national elections in France and Greece or provincial elections in Germany - will be viewed through a prism as a vote for or against the EU status quo.
Politically, the odds are tilting away from the austerity gang and towards the more Keynesian-like spending crowd. But structural hurdles to printing more euros' abound in the European Union governing documents. Hence a vote for pro-Keynesian austerity measures is a sub-rosa vote to break up or redesign the euro.
As I wrote earlier this week in Seeking Alpha, the negative fiscal and economic factors weighing on the euro in its present form vastly outweigh the positive fiscal and economic factors supporting it. Now add in the political currents pushing against the austerity crowd and you begin to wonder just what the catalyst will be that will serve as the tipping point.
If a political tipping point is reached then the narrative for the entire crises breaks away for good from austerity. The debate then becomes either the redesign of the European Union or the dissolution of it altogether. Once that narrative takes hold the endgame could be swift. Remember, back in 1989 the Soviet Union lost its entire empire in just two short months.
I don't know if the euro is going to survive or not. But I do think it is better than 50/50 that a major change is in the offing and soon.
Up until a few weeks ago this was simply an economic/fiscal crisis. But now this is a political crisis and a political crises tends not to go away unless something big happens.