This weekend you should spend as much time as possible holding your breath or crossing your fingers. Storm clouds are gathering throughout Europe and the downpour could begin as early as Tuesday. First of all there is the ongoing Cypriot tragi-comedy; tragic for innocent islanders and retirees who just saw the island as a nice place to keep their savings and see out their days, comedy with regard to the performance of the Troika; judge, jury and executioner in the form of the European Central Bank, (ECB), the International Monetary Fund and European Commission.
Secondly, there is the Italian political imbroglio, which this week descended into chaos as Grillo, the leader of the neo-anarchist Five Star Movement, called M. Bersani and Berlusconi something almost unprintable and Bersani said, “only an insane person would want to govern this country, which is in a mess and faces a difficult year ahead”, following his failed attempt to comply with the President’s request to form a government, raising the likelihood of months of uncertainty and new elections. Rumours abound of a possible credit rating downgrade over the weekend.
Thirdly, Slovenia is quietly imploding and nudging its way onto traders’ screens. The political situation is not much better than Italy’s and the banking system has bad loans equal to 20 per cent of GDP. These resonances caused its government bond yields to soar this week, following the Cypriot "solution".
Along with these near-term, possibly explosive threats, the Eurozone has to continue to cope with the slow-burn problems of Spain, which is failing to meet deficit reduction targets and, perhaps most frighteningly, France’s slowdown. Throw in the chasm opening up between President Hollande and Chancellor Markel and the Euro’s prospects may seem dire.
Notwithstanding all of the above, I remain cautiously, but resolutely certain that the Euro can survive, at least for the foreseeable future - meaning the next three years, say.
If we have learnt nothing else over the last few years it should be that the political will to ensure its survival is enormous and that the ECB is prepared to almost totally divorce itself from its Bundesbank heritage to play its part. Witness the protest resignations of two senior Bundesbankers from the ECB since the crisis broke. Merkel will masterfully persuade the German people to provide just enough largesse to southern Europe, without enraging her populace beyond breaking point, she will probably bend just enough on austerity to satisfy Hollande’s calls for growth, and after the elections she will probably even support the issuance of joint and several Eurobonds, which put all nations on the hook to the same degree. Finally, this Thursday, Draghi will give a masterful performance at the post-ECB meeting press conference, in an echo of his famous "whatever it takes" speech last year.
Cyprus can become a tragic memory, Italy is rich and will survive, Slovenia is small, and Spain and France will slowly respond to growth enhancement. Meanwhile, the US will surprise us all with its outperformance this year, once again acting as an economic locomotive.
So, let your breath out and have an Easter egg, if that is your fancy.