Will France and Italy build now an alliance against Germany?

When the German Chancellor Angela Merkel and the French President Nicolas Sarkozy meet today Mario Monti, the recently appointed Italian Prime Minister, the Frenchman will be more pleased than his German counterpart. The reason is obvious: the EU Co-founder Italy is returning after Berlusconi dynamically on the international stage and will under the former EU-competition Commissioner with his no-joke style play a much heavier role than it used to play under his completely discredited predeccesor.
While Sarkozy and Merkel formed a kind of European directorate since the Greek crises broke out, France could have in the future more options. With a more influential Italy, Sarkozy will have a potential ally that up to now was not at his disposal. Don't forget: France and Italy are after Germany  by far the biggest countries of the Eurozone. If they would pool their interestests, Germany would inevitabily drive in a weaker position than before.
Because one thing has to be clear: Germany with it's unreasonable only-austerity-ideology today  is isolated in Europe. Maybe the Finns have similar ideas, but not even the stability oriented Dutch agree on the orthodox attitude of the German government and - worse - the Bundesbank.
So new scenarios emerge if France opens up to Italy and stops treating exclusively with Germany about solutions for the crises and the future governance of the Eurozone. That could mean a new push for a changed role of the ECB as lender of last resort or in the mid term the creation of Eurobonds.

The miracle of Rome

In the last three days something miracolous has happen in Rome: Italian politics has followed a path of reasonableness and appropriatness. The behaviour of the main political actors has become increasingly rational and smart. Sure: Berlusconi went into parliament Tuesday with fully wrong expectations, that his majority would still be there. But his next steps, to go to the President of the Republic, Giorgio Napolitano, and to offer him his resignation was exactly that, what he had to do in democratic and constitutional terms.
Frankly speaking: I didn't expected such an orderly procedure, because of my doubts, that Berlusconi suffered increasingly the "Emperor Nero Syndrom", that means: a lost sense for reality. Well, I was wrong, and I'm more than happy about this misjudgement.
I think however, that such a reasonable handling of the crises was only possible for two reasons:
1. The impeccable political management of the real hero in today's Italy, President Napolitano. With the perfect mix of pressure, moral suasion and concessions he convinced Berlusconi to do the right thing and to free Italy from his legacy
2. The psycological shock for Berlusconi, when he sat on the government-bench in parliament seeing that even his eldest allies were leaving him alone. It can be compared only to the surprise of Julius Caesar, when he asked to his murder Brutus at 15 March of 44 BC, "tu quoque fili?". Berlusconi had been one of most optimistic men on earth. He was used to win, in politics as well as in business and in his private life. Don't forget, that he created with creativity, also ability, a bit of luck and a lots of corruption out of nothing  one of the most precious media-conglomerate in Europe. For many years Berlusconi was not only the most powerful but also the wealthiest man of the country. He had never expected such an end.
So what's next: After the latest developments I do expect, that this weekend the two chambers of the parliament will have passed the Stability Law, which is more or less the transcript into law of Berlusconis letter to Brussels with a series of commitments, like the increase of the pension age and the liberalization of certain professions. The law is not bad, but it has substantially only the function, to be the very last action of this government. The approval is not in doubt and suddenly after Berkusconi will go to the President to resign officially from the post of Prime Minister. After that, Napolitano will meet with Mario Monti and mandate him to form a new government of National Unity.
 I will explain in my next Blog post, that I will post in the next couple of hours, why Mario Monti will succeed in  forming a very good governement, how he will assure a very solid majority on the parliament and what will be the next steps. With other words: how Monti will save Italy. Stay tuned!

Financial Crises 2.0 ante portas

We are definitely back in the dark days of the autumn 2008. That was my strong feeling, when the news about the life-threatening funding and liquidity crises of Dexia broke. The Franco-Belgian bank will be split up now, toxic assets will be put into a "bad bank", the governments have provided a state-guarantee for the lender. But who cares about that? The shares have more or less halved their value. And nobody believes, that Dexia can survive in it's current form.
The real problem is not Dexia. The real problem is, that Dexia represents just the first European bank in this new phase, the Financial Crises 2.0. We are staring in the abyss. Who's next? All banks with a similar model - fund short term, lend medium-long term - are now eyed with extreme mistrust. That was already one of the main reasons for the first round of collapses in 2008/2009,  like Northern Rock and Hypo Real Estate. The fact, that sovereign debt from the periphery plays nowadays more or less the same destabilizing role as CDO's and similar structured credit in the first phase, makes all banks with a portfolio of Greek, Spanish or Italian bonds, like Dexia,  extremely vulnerable. The parallels between October 2008 and October 2011 look embarrassing. 
I'm sure that the Financial Crises 2.0 cannot be resolved simply by propping up the capital of the European banks. That would be only the right method, if capital strength would be the key weakness of the system. But: the equity base today is already far far stronger than it was in 2008. Markets don't take notice of that. No! The real problem once again is funding and liquidity and the underlying issue is the lack of trust in banks and peripheral European sovereign debt. 
Instead of wasting time discussing about the capital of the banks, the Finance Ministers should discuss seriously about leaving the trust crises once for good behind us.