First there was Greece. That occupied the Euro Zone last year in 2010 and early this year. Nothing else seemed to be going on, and Greece was a Balkan country. You couldn’t expect much from one.

Then it became all the pigs, Ireland, Portugal, Spain, and Greece. That was still somewhat manageable, though Spain has the fourth largest economy in the Euro Zone. They were still southern European countries. People thought the Euro Zone could still pull it off.

Contagion spread. Italy was affected as well as Italian bonds. Many an American mutual fund specializing in bonds contains Italian bonds.Italy is the third largest economy in the Euro Zone, and for once they couldn’t bail her out.

But then last week the unthinkable happened. Rrating’s firms turned a suspicious eye on France’s three star credit rating. They also wondered openly about its banks. Can contagion spread this far this fast? France is after all the second biggest economy in Europe.

Only Germany is left. Can she stand alone? Can Merkel think of a way to save the Euro Zone? With Germany taxpayers in an ugly mood, I wonder.

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The pigs: Ireland, Greece, Portugal, and Spain have been struggling for months to adopt the austerity measures demanded by their northern neighbors: Germany, the Netherlands, and Finland, some say France. But now Italy has joined the crew.

Berlusconi has announced that he will balance the Italian budget by 2013, earlier than expected, by slashing 45 billion euros in public spending. He also promises to raise taxes on people earning more than 90,000 euros/year. Investors didn’t like the previous Italian plan whereby all the cuts weren’t due to take effect until after the next election. They thought they’d be ignored by the new government. So the Prime Minister had to do more.

Whether this will convince investors that Italy can remain the third biggest economy in the Euro Zone remains to be seen. Otherwise, the currency might not continue because Italy, unlike the others, is too big to get a bailout.

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No wonder Germany yearns for a return to the D-mark! Only Germany had control over it. Now sixteen other countries can make decisions about the common currency that Germany cannot control. Nations such as Greece can choose to outright abuse it according to German standards. They can spend more than they make many times over. They can convert their bonds to super junk. And the common currency takes a hit. Germans wish they didn’t use it.

Germany wishes it could make the other nations in the Euro Zone adopt its standards. But Italians are Italians, Greeks are Greeks, Portuguese are Portuguesse, Spaniards are Spaniards, and Irish are Itish. The only way it could succeed here would be to have a currency among same-thinking countries such as Germany, the Netherlands, Austria, Finland, etc. You might have an argument about whether to let France or Belgium in. But that would at least be a more manageable debate.

Money isn’t just money. It’s also culture and politics. Whether it’s viva la differance is a matter of opinion, but it won’t disappear with a flick of a wand or even a nod from Jean Claude Trichet.

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The United States may have lost its AAA credit rating this week. But everybody’s watching France instead. If they lose theirs, the ripples will be far bigger.

The Euro Zone is brand new. Anything could shake it apart. Everybody’s looking for the trigger. They watch with intense scrutiny as Sarkozy meets on Wednesday morning in Paris with his advisors to discuss austerity and pledge that they will propose a constitutional amendment that they must always balance their budget. The French budget hasn’t been in balance for three decades! But more importantly France has a history of political instability. I can remember being in Paris in 1968. Ours was the first tour group allowed into Paris after the student protests on the Left Bank. We were escorted by police. Le Figaro headlines proclaimed, “AZZEZZ DE GAULLE.” And not many years before that it had been Vichy France.

Everyone is piling into treasuries this week as a safe haven for money. It wouldn’t matter if Standard and Poors had lowered the United States rating to junk like Greece. People would do so. For several centuries now the United States has been the place immigrants have fled from political oppression. And since World War II, America has taken Britain’s place as the top dog. Somebody has to be the standard, and we are it. Until that changes, people will react more to France’s credit score than ours. It’s political and historic. It’s not a game of numbers.

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The editorial in the Wall Street Journal, “Bring Back The D-Mark” by Holman W Jenkins, Jr., suggests that the “euro was a noble idea” for two reasons. It would help poor countries and elevate them. And it would solve what became known in the twentieth century as “the German problem” by keeping Germany so occupied that the country could not get into trouble.

But what the Anglo-American victors of World War II fail to realize is that they have set an impossible task for Germany to perform. They want it to head a loose confederation of states with one currency but multiple conflicting governments. In America we got rid of that kind of loose confederation in the eighteenth century and then fought the Civil War to get rid of the remnants of states rights and establish a central control in Washington, D.C.

Germany has no central control of the member states of the EU. It’s just another member, though the most well-off member in financial terms whose currency, the D-Mark, was the envy of Europe. But unless all the states have a common government with a Fed-like body, the ECB, that has the right to make rules for all the member banks instead of just set interest rates, it won’t work.

Germany keeps on insisting upon austerity for Greece, Spain, and Italy. But it can’t enforce such measures. In fact, if Jean-Claude Trichet buys Spanish and Italian bonds, along with Greek, Irish, and Portuguese, it’s the equivalent of printing money. He’s risking inflation. And he’s giving such sttates a motive NOT to pass austerity measures. They will assume that Germany will foot the bill.

So it’s paradoxical. In the modern age you can’t have a successful currency without some sort of central control. If nothing else, maybe the ECB should be given authority over all the banks of Europe. That would be a good start towards maintaining the euro.

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Wolfgang Schauble was not impressed yesterday when Jean Claude Trichet achieved his minor little vindication for his bond buying policy, buying between 3 and a half to 5 billion euros worth. The ECB bought ten-year Italian and Spanish bonds. Italian bonds dropped from 6% to 5.3% and Spanish bonds dropped from 6% to 5.15% a a result. bringing them closer to German bunds.

Trichet says he had to do this because the rescue fund has not yet received the authority to buy bonds. Merkel agreed to let it be raised to 440 billion euros but has said “no” after that. Wolfgang frowns when anyone suggests making that amount greater. The German taxpayers don’t want any such liability.

Besides Trichet’s move didn’t do anything for European stocks yesterday, which were swept up in the downward spiral sparked by the U.S. downgrade. Schauble probably thinks that’s a lesson to be learned. No move will matter unless each country gets the fundamentals straight. Giving money to countries only makes them ineffective and dependent. Adopting austerity measures teaches them a lesson.

That’s called coloring the world Germany.

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The board of the ECB divided along a mostly North/South line about whether to buy Italian and Spanish bonds. Up to now bond buying programs were to be left to individual member states. Germany still thinks that they should be.

After the US downgrade on Friday, Jean Claude Trichet became determined to take the lead role in dealing with the financial crisis. He wants to avoid a world-wide financial meltdown. So he will buy bonds in a big way.

Germany does not want an outside entity dictating its financial policies. So I’m sure we’ll hear more of this conflict in the coming days.

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By the end of last week it looked as if a new world-wide financial crisis was being fueled by the Greek debt crisis contagion that had finally spread to Italy. The Italian bonds were trading at their highest level ever in relation to German bunds. By the end of the week, European political leaders were scurrying about trying to fix things.

Berlusconi pledged to balance Italy’s budget earlier by 2013 instead of 2014.. He also introduced a balanced budget amendment for the Italian constitution. He was also going to fix the regulations that prevented much economic activity such a building a house.

Olli Rehn, the European Union economy commissioner said the countries of the Euro Zone needed to pull together fast. Even the ECB announced that they were going to buy bonds from Italy and Spain.

The mandate is there. German taxpayers are going to have to pay more to beef up the bailout fund.

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Germany must become responsible for its southern neighbors. Their debts should become its debts. And this largest economy in the 17-member European Union must also allow the bailout fund to become larger or better yet allow the ECB to perform fiscal functions. Otherwise the European Union and the euro may not survive.

Most countries can rely on their central bank as a lender of last resort. When you have a currency union like the euro, there are no individual central banks, only the ECB. This bank is prohibited by treaty from lending to individual countries. And when Trichet attempted to do a bond buy back, Germany frowned on that, too.

An emergency bailout fund has been created in place of the ECB having the authority to lend to countries. But it is not large enough. During the summit in July, it was given more authority and its cash reserves were raised, but it was agreed that the changes couldn’t go into effect unless all countries unanimously agreed upon them. In addition even if it is ratified it is still not enough. The fund should have 2.5 trillion euros to lend all provided by the German taxpayers.

Europe must stop its petty squabbling. That is why it could never get along before and why countries went to war. Germany should set a good example.

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Germany and the European Central Bank conflict over the role of the ECB. Germamy claims that the ECB is a currency union supervisor and referee. It’s role is to control interest rates and deal with other currency problems. It’s not supposed to take on a “fiscal role”. In fact, many in Germany say it’s unconstitutional to do so. A case is wending through the courts that would challenge some of the agreements Angela Merkel has already made to save the euro.

Jean-Claude Trichet, the President of the ECB, longs for a larger role. He did a bond buy back of Irish and Portuguese bonds. Last year he did Greek bonds. But he neglected to buy any Spanish or Italian bonds. The reason? The German Bundesbank opposed the idea. They think that if you give countries that much aid they will merely become lazy.

I wonder if the real reason is that German fears it will lose its independence if they allow the ECB to make policy for them.Germany wants to be in charge.

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