One week to save the world

The world is on a fatal deadline. The clock is ticking inexorably towards Armageddon. A bomb planted at the heart of the global economy could explode if it isn't defused by the end of the week.

Europe may be the epicentre of the explosion, but the fallout will damage every country in the world.

Only one woman can deactivate this deadly instrument. Her name is Angela Merkel, German Chancellor. But she faces a cruel dilemma. The US, French, British and Chinese are urging her to save the world. The people who vote her into power demand she saves Germany.

She can't do both.

Our fate is in her hands. What will she do?

I've got the world on a string

It isn't easy, this saving the world business. Especially if you stand to lose whatever happens. Merkel can defuse the bomb by green-lighting European fiscal union, swapping German tax revenues for Club Med debts, and letting the European Central Bank (ECB) flood the world with virtual euros.
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If she does, stock markets will soar, the global economy will be saved and agent Merkel will face political annihilation next time she goes to the polls.

No wonder she is hesitating. If she saves the world, the German people won't forgive her. If she doesn't, the world won't forgive Germany.

Don't let's be beastly to the Germans

The Germans thought they were doing decent thing by joining the euro. They hoped everybody would finally stop banging on about the war, and embrace them as good Europeans. Instead, they have become even more unpopular, especially in Greece.

That's harsh, but Germany is also the stumbling block on the road to salvation. It has dished up ever bigger spoonfuls of unpalatable Teutonic austerity to Greece, Italy, Portugal and Spain, refusing to acknowledge that the medicine is choking them to death.

It has also shot down every rescue package the EU has cobbled together this year, on the not entirely unreasonable grounds that they are the ones footing the bill.

And German exporters have done very nicely out of the undervalued euro.

Misreading Merkel

Last week, markets prematurely decided Merkel had decided to save the world. Share prices flew, led by banking stocks. The FTSE 100 rose 7.5% in a week, its biggest weekly rise since 2009, helped by central bankers launching coordinated action to keep global credit flowing.

Yet Merkel hasn't saved anything yet. She hasn't given the thumbs up light to fiscal union and eurobonds, or rampant money printing from the ECB. Far from it.

Markets got carried away again, the sillies.

Le Grande Illusion

As I write, Germany and France are working on a "grand European bargain", that could see Germany approve a €2 trillion bailout package backed by the ECB, IMF and Eurozone Financial Stability Facility, in return for eurozone countries submitting to strict limits on budget deficits, backed by swingeing fines.

Effectively, there will be an iron-fisted EU commissar overseeing every government tax and spending decision. The Germans call this stability union. It certainly isn't democracy.

Nor is it going to solve the main problem afflicting the eurozone, the attempt to squeeze 17 very differently-shaped countries into a one-size-fits-all currency, with a single rate of interest.

Tension mounts

The clock is ticking. The Eurozone crisis must be defused by Christmas. Or rather, by Friday, when EU leaders gather for their final summit.

The world is in Merkel's hands. Her dilemma is even crueller than we think. If the single currency falls, Germany will fall with it, along with everybody else.

She may try to solve her dilemma by sleight of hand. Waving through covert fiscal transfers with her right hand, while pretending to block them with her left.

Or maybe she will block fiscal transfers with her right hand, while pretending to wave them through with her left.

Confused? Markets almost certainly will be.

On recent form, smiling EU leaders will emerge on Friday brandishing a shiny new financial rescue package, and markets will stand up and applaud hysterically.

A few days later, we will notice that the clock is still ticking...

Kaboom!

I would approach this market with caution. Market response to any bailout package is likely to be highly volatile, if not hysterical.

Buying on the dips is always a good idea, of course, if you're patient enough to wait for the recovery. Buying on the rallies could backfire, because any sigh of relief following Friday's summit could quickly turn to yells of pain.

Either way, it's going to be a thrilling end to the year. I reckon the FTSE 100 could easily end December above 6,000 or below 5,000. Tick-tock, tick-tock...

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