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Various reasons have been given to explain the euro's decline. Some accounts attribute it to a vendor posting the wrong prices for 10-year Spanish bonds. Others attribute it to the IMF's cutting European growth forecasts. It is always difficult to disprove post-hoc narratives, as this analyst well appreciates. However, there seemed to be something more important taking place.

A new front was opened in the running battle between creditors and debtors in the house of Europe. Finland, Austria, Netherlands and Germany (FANG) had previously made it clear that legacy assets would not be covered by the permanent European Stabilization Mechanism. At yesterday's meeting with European finance ministers, Germany's Schaeuble reiterated this position in no uncertain terms.

When politicians want to be clear, they can be. Schaeuble was quite pointed: assuming the previous bank debts was never part of the treaty that established the ESM. Although he did not specify who he was addressing, his message was clear. Other countries, including France, ought to "stop setting up expectations that can't be met."

It took the better part of two years to get Germany's purse on the table, or so the debtors thought. Germany has thus far not parted with the key. Access to the purse is the new front and Schaeuble unambiguously planted the flag.

Investors want closure to the crisis. Isn't that what the reduced risk is meant to imply? Yet what they learned was the battle continues, even if not quite where they had previously been looking, which is also driven home by Merkel's visit and supportive words for Greece.

The terms of access to the ESM and when and under what terms the ECB will assume bank supervisory responsibilities should warn investors that closure will remain elusive.

The debate over the ECB's supervisory role may lead to an interesting opportunity for Germany to strengthen the voice of the hard money camp. This can be seen by recognizing two facts. First, the ECB's supervisory function must be separate from its conduct of monetary policy. The ECB's Vice President Constancio is likely to emerge as Merkel's candidate, ironically for the same reason she was able to support his candidacy for VP at the ECB: to clear room for a German.

A vice president from a small southern debtor country would increase the likelihood that the Bundesbank's Weber would succeed Trichet at the helm. That plan went terribly wrong when Weber unexpectedly resigned, protesting that he could not commend a majority at the ECB and prevent Trichet's bond purchase scheme.

With Constancio heading up the ECB's supervisory function, a new ECB vice president is needed. Germany's Weidmann is the obvious candidate.

Source: The Euro's Decline And A New Front