The Euro continues to trade down this morning. The Euro had been trading around 129 on Friday, briefly ticked to 130 on Monday morning during the euphoria rally, but ended the day in the 127.5 area. This morning it touched 126 and change. So, the Euro market is not cheering this ECU rescue package. Bond yields on German and French bonds and CDS spreads on these bonds are moving higher, suggesting that German and French bonds will, in time, be the story.
Once attention focuses on the weak credit of Germany and France, brought on by the stimulus package, then there will be no one left to rescue the Eurozone and it will collapse.
The right answer is to let the weaker countries restructure their debt (partial bankruptcy) and move on. That would leave the Eurozone stronger and remove moral hazard from the picture. Urged on by Obama, Europe took another tack.
Just as Obama is losing his political strength in the US, Merkel and Sarcozy will not survive this politically. Neither German citizens nor French citizens are enthusiastic about the Eurozone bailout and will give Merkel and Sarcozy the boot at their first opportunity. Ironically, this will put Europe's left in charge of a forced dismantling of their welfare state. A bit of poetic justice.
Any effort to force austerity programs on Spain, Italy, Portugal, Greece (and others yet unnamed) will lead to street riots and political instability. More governments will fall and the economy of the Eurozone will plunge into darkness. These will be the fruits of the Obama-Merkel-Sarcozy policies.
Monday was a great one day rally. Now the reality will set in.