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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I saw immediately that it was deja vu. Now everybody agrees with me. All the relief about the new EU deal is quickly evaporating — even more quickly than in July. All the leaders did was announce that they intended to have a deal. But almost all the details still needed to be worked out.

As soon as everybody figured this out, investors started demanding higher yields for Spanish and Italian bonds. The stock markets in Europe closed down. They began to see that the EU bailout fund won’t do enough. A 10% first loss fund isn’t sufficient when the Greek bonds had a 50% haircut. And how will the bond buying activities of the ECB continue when Germany says no?

Everybody now sees it’s business as usual in the European Union.

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The Germans keep on telling Greece to cut, cut, cut. They urge the Greeks to implement more and more austerity measures. But what is the result? Greece suffers from daily strikes and rising unemployment. They’ve been through five years of recession.

The Germans wanted Greek bond holders to get a haircut. They’ve agreed upon a 50% cut. But what effect does it have on ordinary Greeks in the streets? Bookstore sales are down 70%. Youth unemployment is 40%. 1 in 4 stores in Athens is boarded up.

Germans should ask themselves if the same thing that works for them works for the Greeks. Germans like austerity. They respond to it well. Greeks don’t. They might even ask themselves if Greece belongs in the EU. Greeks talk about a post-World War II atmosphere. That should certainly resonate with the Germans.

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Is it late October or July? It seems like a flashback to several months ago when an EU deal is announced but few details are released about how it will be implemented. They talk about a 50% haircut for Greek bond holders and 30 billion euro sweeteners to the private sectors, but no one knows how it will be implemented. They have promised 130 billion euros for Greece, but the details will only by released by the end of the year so Greece has a plan in place for 2012. The finance ministers canceled their meeting early this week because they couldn’t agree, but now they promised that they will come to some sort of accord in November. Everyone agrees that the banks need recapitalized, but no details have been released.

We all know where this is headed. By early next year there will be a new plan. This one will be outdated by then. You know the rest of the story. We’ve seen it too many times before.

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The only way Merkel could get the German Parliament to agree to the bailout fund was to remind them of the cost of failure. She raised the specter of World War I and World War II. She said she couldn’t guarantee peace without the fund. She said, “If the euro fails, Europe fails.” Still the vote was 503 for and 89 against with 4 abstaining. It was not unanimous. Maybe she needed to bring a photo of Hitler, too.

Late in the day Sarkozy surfaced boasting about the agreed upon 50% write-down for the Greek debt. He also talked about raising the fire power of the European Stability Fund four or five times. He didn’t say anything about recapitalizing banks or how to leverage the bailout fund.

One can’t help but see undercurrents. Hopefully the undercurrents won’t be strong enough to tear everything apart.

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Tomorrow is supposed to be the date for the summit of European leaders. Everyone expects an announcement about what they are going to do to solve the debt crisis. But the nearer the date approaches, the more disagreement there seems to be. Today the finance ministers were supposed to meet. The meeting was cancelled.

There seems to be no agreement about any issue — the scope of leveraging the bailout fund, the size of the fund, the size of the haircut for Greek bond holders, and the size of the bank recapitalization. Merkel is back tracking because of the ruling of the German Supreme Court that said she had to consult Parliament. She now says that the ECB should not go on buying the bonds of Italy and Spain.

Perhaps Merkel and Sarkozy will have to agree to disagree.

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All along the Germans have been saying that the investors in Greek bonds should have to accept a haircut. Now they’re getting their way. The only question that remains is how much of a haircut? The French say 40%. The Germans say 60%.

The details of the plan are supposed to be released no later than Wednesday. It will also include a plan to recapitalize European banks and a plan to include a bigger bailout fund created by leveraging.

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The Germans won’t just print money. They won’t let the ECB get away with doing it either. That is what the Fed would do. That’s what the Fed wants Germany to do. But Germans have their own ideas about such things. They wouldn’t do it because of inflation risks and hyper-inflatIon risks. Nor are they interested in putting themselves in debt to bail out the Greeks, Portuguese, Spanish, or Italians. They wouldn’t even do it to bail out the French.

Instead they expect countries to cut their budgets and adopt more austerity measures. Otherwise the currency won’t survive.

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Dealing with the credit crunch in Europe is a perfect illustration of the conflict between Anglo-Americans approaches to a solution and the ones the Germans insist upon. The United States criticizes Angela Merkel for not going far enough. They want her to boost the bailout fund to trillions of euros so that it can deal with anything.

What do the Germans say? They insist on a haircut.

Anglo-Americans believe in the broad sweep of democracy. They extend it to the lowest common denominator approach and try not t o leave anybody out. The Germans believe in setting a standard and expecting everybody else to live up to it. If others don’t live up to it, too bad. They may have invented socialism, but it’s only for those who live in Germany, the “folk”.

So the English and the Americans can keep on telling Angela Merkel and Wolfgang Schauble to do more for Greece. The Germans will continue to insist that the Greeks must cut back and practice more austerity until their budget is in order. It doesn’t matter how long it takes or how many Greeks riot in the streets. Nor do they care what Jean Claude Trichet says about the “United States of Europe”.

The Germans remember the 1923 hyper-inflation as if it were yesterday. They fear to print more money to keep everybody happy. They think such practices are at best a short-term solution inviting long-term disaster.

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