The Great European Divide: Why Europe is a Lost Cause

We were "supposed" to get some kind of plan today out of Europe that would stabilize the financial markets, and have an actual concrete plan for saving the European Union from financial disaster. So much for that. Germany and France apparently still can not come to terms on a deal, and this mess has gone on for seemingly forever. This morning, we got comments from Germany Chancellor Angela Merkel that almost sounded threatening, and laying the seeds for the potential for war. Merkel said, "No one should take another 50 years of peace in Europe for granted," and it "is the most serious crisis we are in since World War 2." Germany and France want a financial tax, but the bankers do not, and the two sides have continued to butt heads over this issue. This particular European Union Summit was supposed to give us something concrete, and every headline out of Europe has done just the opposite. The situation right now is with Greece, the size of the European Financial Stability Facility, and how to stop the spread of potential contagion, and lastly, recapitalizing the European banks. Many are expecting a 50% haircut on Greek debt. That is far higher than the 21% haircut that was first talked about in the beginning. From there, the European Financial Stability Facility fund needs to be leveraged, perhaps several times to help deal with the potential contagion that might be seen in Portugal, Ireland, Spain and Italy. It currently has €440 billion in funds, but needs to be levered several times to deal with the potential problems in Spain, and especially Italy. The Denmark Prime Minister called today a "critical day for Europe's future." The German lower house of government, Bundestag, passed by a vote of 503-89. Germany is on the hook for about $221 billion of the EFSF, almost 50% of what is already in the fund. If the fund is leveraged and losses do happen, Germany could very well be on the hook for a lot more than $221 billion. That could potentially be the end of Merkel's government, unless a

which she has been vehemently opposed to. The ECB's Juergen Stark, who is retiring at the end of December, has made some frightfully hawkish comments, only adding to the nervousness today. He said the global crisis is far from over, and that the ECB can not save a country, and that current interest rates are appropriate. On the other side, we have comments from European Union Jean-Claude Juncker, acting a bit more dovish, saying that Italy knows it must take great austerity measures, otherwise Italy's bond market could

Juncker said that a direction must be clear by tonight, and that a sustainable decision must be made today. We also have other officials saying we might not see the true capacity of the EFSF tonight, and that a full decision will come in November. Even more worrisome, the heads of the major banks, including Deutsche Bank

, BNP Paribas, etc. will not be at the summit tonight. The heads of the European Union governments are there, but not their counter-parties. There are also reports that talks with the banks over the losses on Greek debt are said to be "deadlocked", and that involuntary Greek haircuts can not be ruled out. After having digested all of this, and reading every other headline, there can only be one conclusion: Europe is an utter disaster. I was half kidding last week when I wrote about this taking

but now it seems like that may be more prescient than even I thought. When you have 17 heads of states trying to come up with 17 different plans, and very little common ground, not much can be expected to get done. Merkel and Nicolas Sarkozy were supposed to be the ones leading the group and getting everyone in line, to make sure Europe could fix itself. That has not happened. Europe is not just a lost cause, it is a patient that has been dead for quite a while. Just nobody bothered to tell them.

Traders who believe that Europe will fix its problems before the year is out might want to consider the following trades:

Traders who believe that nothing will happen after the summit tonight :