Posted by: Matthias Paul Kuhlmey

Strong words: Both the German Chancellor, Angela Merkel, and her Federal Minister of Finance, Wolfgang Schäuble, have recently made comments that the issuance of Eurobonds (a way of sharing the debt burden of Europe, collectively) would only occur over their dead bodies. To my surprise, when sipping the Sunday morning coffee and checking on the “status of the world,” a story in the German Der Spiegel surfaced, suggesting that Mr. Schäuble (and other German politicians) is becoming more open to the idea of Eurobonds. Wie bitte?

At the beginning of last week, I indicated in our regular Moneylife radio interview on Europe that the (4th of July) “firework” unleashed in financial markets would most likely “fizzle out.” Sure enough, this was the case in equities, but even more recognizable in the Euro/Dollar exchange rate. Last Friday, the currency pair broke significant levels to the downside, and is now trading at 1.2270 (for reference, this exchange rate was at 1.30+ levels in February of this year and 1.40+ in late 2011). Do market participants (and Herr Schäuble) know something we don’t? Certainly, they do.

One of the main issues of the European Union (and European Monetary Union for the purpose of our discussion) is that its banking system is, simply speaking, “bust.” It is absolutely instrumental to re-capitalize European banks (as the U.S. essentially did in 2008/2009), and, at a minimum, attempt to make them a strong anchor to the European economy (which, by the way, is larger than the U.S. with USD 17.6 trillion in combined GDP vs. 15.1 for the U.S.). With failing banks in mind, we are convinced that even the most conservative (German) politician is realizing that the game is over (in hindsight, it seems last October’s aptly titled blog, Game Over, was spot on) and that only drastic choices can help to “buy” time, and (hopefully) possibly relieve financial markets from continued stress.

Goldman’s Huw Pill, recognizes Europe’s Long March ahead – a position of further socializing the aspects of fiscal integrity and sharing the mutual debt burden. Whereas the process has been insufficient, so far, months may pass with market participants continuing to celebrate early and little victories. Let all stay healthy to “embrace” the volatility to come – especially you, Mrs. Merkel and Mr. Schäuble, as you have already offered your (political) life to your cause …