Analysis: Euro zone postpones its rescue again

London — Once again an economic crisis is trumped by a political crisis.

That's the view in Europe about the postponement until Wednesday of a decision on the best way to leverage the European Financial Stability Facility. EFSF is meant to create the firebreak against the Greek crisis spreading around the euro zone.

German Chancellor Angela Merkel and French President Nicolas Sarkozy were supposed to have announced a plan by now. But after a second head to head meeting in four days they broke off talks early yesterday. This scuppered hopes that the deal to leverage the 440 billion euro fund ($606 billion) would be agreed at an EU summit in Brussels Sunday.

In some ways this latest twist was to be expected. Long time followers of the EU know that no crisis — diplomatic, political or economic — is ever resolved in a timely fashion without drama.

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Stephen Gallo, head of market analysis at Schneider Foreign Exchange, says the markets at least know what to expect, "The apparent Franco-German tensions does not seem to have spilled over too heavily." The postponement of the decision for 72 hours, according to Gallo, "… does nothing to suggest the tensions are now at an end, but there is also nothing to suggest they've flared up significantly either."

Veteran traders understand the camel-like nature of the EU — if you agree that a camel is a horse drawn by a committee.

The EU is a political union with no sovereign government. Instead unity has to be reached by 27 governments, or in the case of the euro zone, 17 governments. It's a system that has never worked well but doesn't work at all now.

We live in a time of weak governments. Three euro zone countries don't have fully empowered governments at all — Belgium, Slovenia, and Slovakia have only caretaker or interim governments. Others, like Germany, are the prisoners of coalition politics.

One French source in Brussels close to the Merkel-Sarkozy discussions told the French newspaper, Liberation, the failure of Merkozy to reach agreement yet was not because of the German chancellor, but Wolfgang Schauble, her finance minister, who has his own political agenda. Schauble may be positioning himself to replace her. He has fought against increasing the size of the haircut private banks will take on the Greek bonds they hold.

As for France, Sarkozy's ratings are plummeting and last weekend his Socialist challenger for next year's presidential election was chosen. Francois Hollande is seen as a strong challenger because he is everything Sarkozy is not: calming, conciliatory, low-key.

Sources close to the EU point out that in the recent past, before EU expansion in the late 1990's, when critical issues came up France and Germany would reach agreement, then everybody else would fall into line (Britain often negotiated an opt-out if it didn't like a policy). Today, that rule no longer applies.

One EU source reminded GlobalPost about the arc of the story so far. An agreement to allow the EFSF to buy bonds in the secondary market was made at a summit in July. Because this fundamentally altered the initial terms that set up the EFSF, this agreement needed to be ratified unanimously by all 17 euro zone countries. The last to vote on it, Slovakia, rejected it. The government fell. Then a new vote was held and it barely passed. That was just two weeks ago.

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It is this built-in foot-dragging mechanism in the euro zone that has alarmed the Anglo-American axis. Yesterday, Sarkozy, Merkel, British Prime Minister David Cameron and President Barack Obama took a break from watching news from Libya to conduct a video conference on the situation, the Financial Times reports.

Obama was trying to get his French and German counterparts to focus on agreeing on the package, according to EU sources.

How long this can go on is limited.

A G-20 summit is being held in two weeks. That is the deadline for a rescue package for Greece and the euro to be agreed upon. Knowing the history of EU decision making it is not out of the realm of possibility that a final decision may not happen until a day or two before the summit … that would be a very big mistake says currency analyst Gallo. He says the currency and bond markets can be patient a little while longer … maybe, "For now (and “for now” might only involve the time period stretching from today until the Asian session of next Monday), the sequential nature of these upcoming summits may keep a lid on euro negativity."

If there is failure to reach agreement by Wednesday it is probable the market bears will attack the euro zone aggressively.

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