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Euro Looks Endangered

Europe is weak because the eurois looking like an endangered currency in its current form.

European stocks hit another downdraft in the past two days on the realization that the northern European electorate is balking at even the current level of bailouts, let alone discussion of a closer fiscal union.

"BS sees "sovereign default, corporate default, collapse of the banking system and collapse of international trade as possibilities for any country leaving the Euro." -TraderTalk, Bob Pisani

It was a bad weekend for German Chancellor Angela Merkel. Merkel's party, the Christian Democrats, and her coalition partners, the Free Democrats, fared poorly over the weekend in local elections in Merkel's home state of Mecklenburg-Vorpommen.

The German Parliament is set to vote on September 29 on the Greek bailout and on the expansion of the EFSF program. These local elections are seen as referendums on the German electorate's willingness to back bailouts.

The results were not encouraging for Merkel, or for those trying to cobble together a coalition to get bailouts through northern European countries. Her coalition has 330 votes in Parliament, but a majority is a mere 311 votes, so by any standards this is a coalition with very little maneuvering room.

However, in two mock votes this weekend, 14 in her coalition voted against the package and another 11 abstained. Do the math: if 5 of those abstentions turn into "no" votes (making it 19 "no" votes), then her coalition may not have the majority needed to pass the bailout legislation.

Without the EFSF expansion — and more authority for the ECB down the road — speculative attacks will intensify against Italian and Spanish sovereign debt, which is exactly what has been happening in the past two days.

And the southern Europeans don't want austerity. Then we have the fact that the Italians are set to stage mass demonstrations this week at the mere introduction of an austerity bill. Remind you, there is no austerity in Italy: the mere discussion of it is sending the country into a frenzy.

If there is a euro breakup, what are the consequences? UBS, in a much-discussed note over the weekend, said that "popular discussion of the break-up option considerably underestimates the consequences of such a move." It then went on to list sovereign default, corporate default, collapse of the banking system and collapse of international trade as possibilities for any country leaving the Euro.

UBS insists that their base case "is that the Euro moves slowly (and painfully) toward some kind of fiscal integration." But with Merkel looking like she will have a hard time getting the votes she needs, the markets are focusing on the negatives.

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