Euro: A failing friendship

As we witnessed today in the bond market, France is now starting to be hit with the European contagion as they sold debt at historical highs since the creation of the Euro. Demand for these bonds also fell as measured by the bid to cover ratio. Political comments coming out of France is again putting on the agenda the ECB role as a lender of last resort. Within 30 minutes of this statement Germany responded via Merkel clearly stating that Germany does not believe ECB is mandated to do this. It is understandable why this point will lead to a strain on the German-French relationship. France and Sarkozy need a quick remedy. With elections around the corner Sarkozy's winning ticket is how he has handled the debt crisis in Europe. If France is beginning to struggle to refinance its debt this will devalue this argument. Germany as the biggest shareholder in the ECB and therefore as the biggest monetary contributer is reluctant to give an increased balance sheet to the ECB without the proper infrastructure in place to monitor and manage borrowing countries. Germany also suffers from the fact that the governments mandate to act on European issues is weaker as they have never allowed the German people a proper vote on their position in Europe. This is ultimately causing a strain on the friendship. Another way to view it is as a business. When the two most powerful executives in a company in trouble disagree it tends to start as tension that eventually leads to the company suffering and sometimes not surviving. It is essential for market psychology that somehow France and German resolve their issues and unite.