Merkel said to Greece, “Do what we ask, or you’re out!” She would never dream of saying this to Italy. Likewise, when the European finance ministers met in Brussels on Monday, one of the things they were doing was trying to cultivate China as a way to sell Italian bonds. They would never put themselves out for Greek bonds. Italy is at the center of Europe. There would be no Europe without Greece. Italy just isn’t that important. It’s a Balkan state, on the fringe.

Likewise no one in Germany would ask Russia to buy bonds. Like China, Russia has lots of cash. But unlike China, no one would trust Russia. Besides, the Euro Zone is a German show. Russia would be rigidly excluded. Nor would Russia want to participate in the new kind of German empire with expansionist ambitions.

An interesting P.S. Is provided by TUI, a travel agency. It asked Greek hotels to accept payment in the new Greek currency next year if they drop out of the Euro Zone. The Greeks were offended. No one would ask Italy such a question. And no one would even talk to Russia.

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There is a widening gap between Germany and the rest of the Euro Zone. While France has to pay more to finance their debt and is in danger of having their AAA rating lowered, while Italian bond rates soar, while Greece is mired in political turmoil over the terms of the Greek bailout, and Portugal and Spain don’t fare much better, Germany is getting ready for a tax cut.

The tax cut will go to low to middle income tax payers. Berlin is able to pay for this because of a windfall created by an accounting snafu. Six billion euros will be returned to the German populace w who complain about having the fruits of their labors distributed to wastrels in the south of Europe.

At the same time the unemployment rate is the lowest in two decades. The fiscal deficit fell below 25 billion euros. The German budget will be balanced by 2016.

No one else in Europe can say as much. But then the truth of the matter is that the euro is the German mark in a very thin disguise. That’s why all the other countries wanted to participate in it. They wanted to be lifted up to Germany’s economic standards. But is it possible to sustain?

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The Greeks raced to form a new government this weekend in the wake of the resignation of Prime Minister Panpandreou. They must have one in place by tomorrow for a meeting of the finance ministers. There was a three-way meeting among Papandreou, Samaris, leader of the opposition, and the President of Greece to come up with a temporary government until they can hold an election next year. As soon as it is in place, Papandreous will leave office so that the Greek Parliament can approve the new bailout by the end of October. Venezelos is to lead the delegation in Brussels tomorrow.

I don’t think is move does the Greek bailout any good. Venezelos was against the bailout before. Even if he’s paid lip-service to it in recent days, I wouldn’t trust him.

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Bond yields in Italy hit record highs. The IMF offered them a loan. Berlusconi rejected it but accepted financial monitoring, rare for a country of Italy’s size.

Berlusconi complained about “ancient prejudices” against Italians. It is true that for centuries the Germans haven’t taken Italy seriously. They didn’t expect much of them, and they were the butt of lots of jokes. Italians had a lackluster performance in World War I and World War II.

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England started to decline in late nineteenth century, but Germany started to rise after unification. This power vacuum at top allowed World War I to begin. England pulled it out by getting American aid. But Hitler tried it again. He was defeated again by America. World War II continued into the 1990’s. Germany switched sides in 1945. Germany became an ally and was rewarded with hegemony over Europe, its new kind of empire.

This is what Hitler wanted more or less minus Russia. Hitler was short-sighted about the political system, preferring dictatorship over democracy. But that was understandable coming out of World War I. Hitler and Hess wanted to make a deal with the Britain about powersharing. Hitler would control the Continent. Britain would control Africa, Asia, and the English-speaking world. That is sort of like what happened anyway if you consider America part of the English sphere of influence.

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Papandreou cancelled the planned January referendum on the Greek bailout package agreed upon last week. He said that it was irrelevant now that the opposition party backed the bailout plan.

He gave in to Merkel’s demands that he either accept the bailout terms or leave the Euro Zone. Sarkozy backed up Merkel. Maybe it required such a scare to get the Greek opposition on board.

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Merkel finally lost her patience with the Greeks today. She issued an ultimatum. She said either they shape up or ship out. She thinks that last weeks summit on Greece was something to be thankful for. She expended a lot of political capital to get fellow Germans to agree to even that much, meaning the 50% haircut for the Greeks and promises of more aid. She doesn’t think they are taking their membership in the EU currency union very seriously.

This underlies a feeling of many Germans that the euro should be abandoned for the mark. Either that or they should have a currency union only with other like-minded countries such as the Netherlands, Austria, and Finland with perhaps the Czech Republic and Slovakia thrown in. But what’s interesting is that sounds like the old German Reich.

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We’ve known it all along, but somehow now that it’s ready to happen, we’re surprised. The Troika has been pouncing on Greece for months. They’ve demanded more and more austerity measures. Greeks are losing their jobs.

Now the Prime Minister is calling for a vote in January on the Greek bailout approved last week by the EU. It’s a high stakes gamble. If the Greeks vote yes, it make help to drown out the street protests. But if the Greeks vote no, it will bring down the government. And Greece may stop using the euro and drop out of the EU.

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Italy has bond problems. The yield rose to levels not seen since August when the EU had to step in with his bond buying program. 10-year-bonds , BTU’s, jumped to 6.1%. Italy might be at the center of the crisis, but it’s a wild exaggeration to say that Italy’s membership in the European Union is at risk.

Europe cannot get rid of Italy. Unlike Greece it’s not at the periphery. It’s the core of all European civilization. That’s why it’s the only country that was on both sides in World War II. Even with a growing risk of recession, Italy is there for the long haul.

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All data now points to a decline in GDP for the EU. That will make coming to a deal to fix the EU economics all the more difficult. This will be the first decline since the 2009 recession.

The Euopean commission says that consumer confidence fell to a 2-year low in October. EU statistics Agency, Euro Stat sholwed that the household savings rate is going up. No one is spending money.

The result? The ECB is going to meet this coming week to cut the interest rates.

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