There’s no point on agreeing or disagreeing on outcomes, because they have not happened yet, but Munchau is a perfect example of the British press setting the bar higher for the EU than for the locals. Leaving aside that euro bashing sells more papers in Britain than its opposite, there is a generally gross underestimation in the anglo press of the fundamental desire on the continent that the EU and its money succeed, although this is almost totally masked in normal times when squabbling over bullshit takes the fore.

Note that the impetus towards establishing an EMU bank stability fund is today coming from Berlusconi – the absolute most unlikely of sources imaginable. I’d been wondering what was behind his recent notable silence.

They will do what has to be done.

I suggest you read Wolfgang Munchau in the FT today, who makes a very cogent case that the felicitous outcomes so far were based on relative good luck in who hit the wall. See the Comment section.

The difficulties involved in effecting a transnational solution were made evident by the failure of E-On to take over Endesa and Sacyr, Eiffage, because of political pressures. On the other hand, the German utility was bribed into backing off with the sale to it of 10 bn of Endesa’s assets. Similarly, Sacyr backed off when French insitutional investors bought out its 33% stake at a premium to market.

There’s way too much attention paid to the EU structure and too little to the desire to make it work. Deals get made when necessary.

Agree completely with Kevin on the issue of deposit insurance. Gets rid of opportunities for arbitrage without treading much on sovereignty issues and it’s hard to imagine widespread popular opposition to a plan that would continue to guarantee deposits.

Ireland? We’ll send a bellhop up for your luggage. What was your room number again?

The motivation of this sudden change or heart is the Anglo-Saxon desire for Europe to match the US’s example and cut a check to its financial elite for hundreds of billions of coke-and-whore cash. Otherwise the fear is that the US’s elite will have to share their $700 billion stash with both their European and Asian peers.

The problem is that the European level of government has a tiny budget and no where near enough political legitimacy to transfer such a huge amount of wealth to Europe‘s financial elite.

In fact the Anglo-Saxon’s actually did have at least one pretty good point in their fear-mongering about a Fourth Reich in Brussels, which is that political decisions are best made at as local a level as possible. For banks that means the national level. For this is the level where real taxes are collected. In fact the national central banks are acting in a way similar to the regional Federal Reserve banks. The decision to either bail out a bank or let it fail is best left to the officials who will bear the brunt of this decision, not faceless bureaucrats in Brussels or Frankfurt.

That said there are policies that can and should be set on the European level. One de facto positive decision seems to be that banks will be bailed out by equity injections and not by blank checks as in the States. But one glaring deficiency is the lack of a proper deposit insurance regime. These rules should be set at the European level while being executed at the National level.

So if our favourite neo-Anglo-Saxon, the French Finance Minister and U Chi graduate Christine Lagarde wants to play Paulson, then let her go before the French taxpayers and ask for such privileges. Surely that would be preferable than allowing some star chamber European elite to make such an important decision? Right? Or am I lacking in my knowledge of Anglo-Saxon economic theory?

That said, European countries do have a long history of working together, and it’s unfortunate they couldn’t come up with something better than rescuing banks on a case-by-case basis. The next opportunity for success (or failure) will be the G7 meetings: http://baselinescenario.com/2008/10/04/g7-at-the-bat/.

That’s hardly a strong shift towards the left, especially since the biggest winners were the libertarians. The election result in Bavaria has nothing to do with the current economic woes and everything with local politics.

There has been a mild resurgence of the political left but we’re far from a political tectonic shift.

The fact is that most people in Germany probably feel like pawns in a global economy that cannot be influenced significantly by national governments. I doubt that many believe that voting for far-left parties would make a lick of a difference.

A lot of what has been perceived as “Euro glee” in the past couple of weeks was actually a sort of catharsic excerise.

People felt at the mercy of an anti-social Anglo-American socio-economic system, with smug Ivy League educated investment bank analysts telling Old Europe how to “fix” their economies the American way.

Now there is the feint hope that, once the smoke has cleared, there might be a window of opportunity to do things differently.

Global neo-liberal capitalism hasn’t delivered the goods it promised. Instead of an “ownership society” we got the “debt society”. Instead of an expanded middle class we got wage stagnation and a widening wealth gap between the top 20% and the rest. Instead of economic stability we got a system that wrought havoc upon traditional middle class career structures and introduced economic and social insecurity on a huge scale.

So yeah, people are sick of it but I don’t think they believe that voting for yeasterday’s failed ideologies will alleviate the problems.

The general acceptance of capitalist market economy may be threatened in the long term if things keep getting worse but at the moment it’s still a complete non-issue.

Anonymous, the fact that implied volatilities are at record levels for the currencies is in no way probative of the directionality of the move of any one currency.

All the readings of these implieds means that it is turbulent as heck out there, up AND down. And again, these models that predict future values in those markets are based on Gaussian distributions. But we are seeing literally hundreds of events that are five standard deviations outside the norm, so all such valuation models really need to be taken with several grains of salt, at the very best. And there are different WAYS to calculate implieds as well, depending on how you weight the near-the-moneys.

By way of analogy, the VIX (which also measures implied volatility) is at or near record levels, but that is NOT intended to predict, per se, the directionality of the S&P 500. Recall that we have had some amazing short squeezes in the bourses, as well as steep downdrafts. Up and down BOTH.

Second, a small factoid may assist in understanding Merkel's plight.

Last week in Bavaria (as you might have guessed), the far left (as opposed to the centre left) made an exceptionally strong showing, shocking the German political establishment and threatening Merkel's Grand Coalition which she had cobbled together so carefully.

So she, like Sarkozy, will be under more and more pressure to reject "market-based" solutions as they try to keep pace with a resurgent European left.

Conceptually, this strong shift to the left at the grassroots level in Germany, France (and indeed throughout Europe) resembles the boost Obama has received from this catastrophe.

Matt Dubuque
mdubuque@yahoo.com

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