Rough Road Ahead for the Eurozone Nations


After weeks of squabbling and exchanging barbs, European officials finally seem to have found a credible solution to the Greek debt crisis. Eurozone members along with the International Monetary Fund agreed to provide loans to Greece in the case of an emergency in an arrangement hammered out late Thursday.

The move soothed investors and caused the euro to rebound against the dollar following a slide to 10-month lows. Still, while much has been made of the economic difficulties facing the eurozone -- countries with vastly different markets have been put under one roof, after all -- the accompanying internal political frictions in resolving this major shortcoming have also been on full display.

And with the spats simmering down, the stronger-than-expected recovery taking shape in the U.S. should set the pace for currency trades in the near future.

Euro Tensions

The heavily indebted Southern European economies like Greece, Spain and Portugal have obviously been the center of attention lately. But investors should note that the most recent agreement also represents a behind-the-scenes reconciliation between the eurozone's two feuding Goliaths: Germany and France.

An earlier European solution that showed signs of materializing was quickly torpedoed, for example, when French Foreign Minister Christine Lagarde said the savings-laden German economy should shoulder more of the burden and clamor less for fiscal discipline by other EU members. "[Could] those with surpluses do a little something? It takes two to tango," Lagarde told the Financial Times. "It cannot just be about enforcing deficit principles."

Hypersensitive to accusations of mercantilism, the Germans responded swiftly. Finance Minister Wolfgang Schäuble lampooned the French view by comparing it to his disappointment in watching a German soccer team losing to its French rival. The French suggestion was akin to asking the French team to take down its performance next time, rather than looking for the Germans to improve theirs, he said.

Another prong of the German response: insisting on International Monetary Fund involvement in the Greek resolution, a move long opposed by French President Nicolas Sarkozy. While he has said bringing the IMF into the fold would only show that Europe can't manage its own affairs, the move also threatens to strengthen the hand of his likely rival in the upcoming elections.

"Allowing the IMF to provide funds to Greece may also provide a platform for Dominique Strauss-Kahn, the Washington-based lender's managing director and potential challenger in 2012 elections," Bloomberg News reported. Conceding to German demands follows a week of major setbacks for Sarkozy, who saw his party hit hard in regional elections this week and has had to abandon some parts of his agenda, including a carbon tax.

The Bigger Picture

Investors should look past the latest bout of intrigue and feuding to the bigger picture, though. Elaborate political jabs and compromises -- much like high unemployment rates, but also generous social measures to ease their pain -- are simply a feature of the European landscape. Market jitters at every turn of the grandstanding leading to the current compromise, then, may have been overdone.

The disparities in growth rates now materializing between the U.S. and Europe, on the other hand, are more fundamental and meaningful. As interest rates edge up in the U.S. and the Fed shows signs of tightening, European officials are facing a stalling economy and headwinds in the form of likely new austerity measures.

An end to the bickering about Greece may have halted the euro's most recent slide. The much tougher task of managing a robust economic recovery, though, remains ahead.