In mid-morning Friday, the word from Brussels was to prepare for Greece leaving the euro zone and returning to its own currency. This possibility gained traction because of Germany’s resistance to euro bonds and because Greece is on the verge of defaulting on all its obligations, including agreements to repay bailout funding.  Both the IMF and Germany are adamant about Greece living up to its obligations.

By midday, the euro was at $1.2511 USD and trending below the $1.25 resistance level. The euro is at its 20year low. Many Forex advisers believe that if Greece is out of the euro zone, the euro will fall to the $1.23 level and finish the second quarter at $1.20 falling to $1.15 in quarter 3, 2012.

Euro uncertainty has boosted the dollar as a safe haven. Against a basket of currencies, the dollar held firm at 82.411, the highest level since 2010.

The euro zone unrest will affect US exports.  19 percent of US exports are delivered to members of the 27-nation European Union. Euro zone exports account for 13 percent of total exports. Euro zone members.

Deutsche Bank issued a statement indicating that in 2010, Europe comprises 25 percent of world trade. The continent is a major importer for both the US and China.

If Greece puts a government in place in June, it is very possible the country will default on everything. The country will run out of money and will have to print its own currency.  The country will be in internal chaos.

What did emerge from Brussels is a variety of ideas about surviving the exit and default of Greece. Contingency plans are already in the works.  The member nations are trying to shield Portugal and Spain.

However, the biggest challenge facing the region is investor confidence. Greece is in a vulnerable position.  The country has little leverage and a history of breached agreements. The country accounts for about 2 percent of the region’s GDP. The exit of Greece would have minor consequences for the US but larger ones for Germany, France and its allies.  If other nations follow Greece’s example, the euro zone could disintegrate. That would be a serious problem.

Today, CNBC reported that a large concern in the euro zone is the scarcity of investors. There is no confidence that the members can negotiate a balanced remedy involving both austerity and growth.

When it rains it pours. S&P downgraded five Spanish banks on Friday. At the same time, Banksia, a conglomeration of failing banks assembled by the government, said it needed 15 billion euros to stay afloat. A failure in Spain carries much more serious consequences than the failure of Greece and would most likely trigger a series of international defaults.

A crash of the European Union banks would cause a crisis larger than the fall of Lehman Bros.

In today’s summit, German Chancellor Angel Merkel, the most powerful advocate of austerity, will faceoff with newly elected French President Francois Hollande who won on a platform of growth.  Merkel has come under intense pressure of late.  The Chancellor’s conservative party Christian Democrats (CDU) suffered another setback last week when the centrist-left Social Democrats (SPD) logged a decisive win in North Rhine-Westphalia (NRW), the country’s largest population center.  The CDU popular support dropped 4 points to 31 percent whole the SDP support rose 1 percent to 27 percent.

O’Neill reported that Germany recently increased the country’s pay rates by 4.3 percent.  This indicates that Germany is preparing to boost its GDP with this additional internal spending power.

O’Neill suggested that the loss of Greece to the euro zone would shake markets in the near-term but would not have the impact that a collapse of the euro zone would have.  O’Neill suggested that a failure in Greece might have a bullish effect on the investment community that is unenthusiastic about the euro zone and the contagion that is plaguing the region. The Goldman strategist repeated that it was time for a serious resolution about Greece, Ireland, Portugal, Spain and Italy.  There has been too much dialogue and not enough action.  The euro zone needs to set policies that cross geographic boundaries.

O’Neill emphasized that Greece is just one of many issues.  The EMS has the clout to save Greece and Portugal but not Spain and Italy.  In his opinion. France and Germany need to represent their region.  However, France represents France and Germany represents Germany. This is the formula that could topple the euro.

Realistically, Greece can ill afford a default and a withdrawal from the single currency alliance. In the immediate-term, Greece banks will run out of money, pensions will be raided and the GDP will drop significantly lower than the negative GDP the county experiences now.

At today’s summit in Brussels, the main item will be a discussion of the creation of euro zone bonds and whether these bonds could alleviate two-years of massive debt.  Today’s summit arks the first time in the past three years that Germany and France have not met prior to the summit.  These last minute meetings have enabled Merkel and former President Sarkozy to provide a united front.  The German Parliament issued a verdict yesterday that if Greece fails to commit to honor the terms of their bailout, the country should receive no further financial funding.

In early morning Forex activity, the euro fluttered at a two-year low and nearly sunk below $1.26 USD.  The US continues to rise against a basket of currencies.  O’Neill was quick to point out that he believes the US is on the way out of its muddled financial meltdown.

The USA, Germany, France, Canada, Italy, Japan, Russia and Britain comprise the G8. Italy and France are enduring serious economic turmoil.  It was hoped that this weekend get-together would produce something encouraging.  No such luck.

Sometimes it is impossible to relate to all the spin from world leaders.  Interpreting the spin from the G8 summit at Camp David boils down to one word; growth.

President Barrack Obama wants growth at home and growth in the euro zone.  Newly elected French President Francois Hollande wants growth in France.  If anyone can figure out what Greece wants, other than have the rest of the world support them ad infinitum, please send it in.

The results of the weekend G8 summit at Camp David seem to reflect a quiet desperation.  Now that it seems austerity will not work, the G8 is recommending growth.  That sounds simple enough but how does a continent that is mired in recession go about growing its GDP?

Quantitative easing.  That is how it is done.

Germany and Chancellor Merkel want austerity.  If a country wants Germany’s money, they must meet Germany’s demand for austerity.  Sometimes Germany sounds more flexible than its taxpayers which cannot understand why Greece would receive any German funding.

If these countries had the demand, they would not be in recession. Demand is slow, bond yields are at unsustainable levels and the public is taking to the streets.  Obama summarized his take on the meeting as follows. “As all the leaders here today agreed, growth and jobs must be our top priority.  A stable, growing European economy is in everybody’s best interest, including America.  Put simply, if a company is forced to cut back in Paris and Madrid that might mean less business for manufacturers in Pittsburgh or Milwaukee.”

Try to figure that message out. How does that series of events help to grow Europe’s teetering GDP?  Is Obama so concerned about his re-election that he cannot relate to anything outside his re-election. One underlying theme is that the G8 believes the euro zone has the funds to overcome it financial challenges.  In other words, good luck to you across the pond because we cannot help.

The positive spin from this G8 summit is that world leaders understand Greece’s plight.  Everyone wants the country to remain in the euro zone.  That could happen were it not for the Greeks themselves.

Besd9ies the wish to keep Greece in the euro zone, the only significant policy announcement was a recommendation that austerity should be tempered and some form of quantitative easing be put in motion to add the possibility of growth into the equation.

The Group of Eight leaders issued a statement saying that they supported Greece remaining in the euro zone but asserting that they must meet the bailout conditions. The UK seems like a disinterested third party but in reality, their economic structure relies heavily upon the global financial strength.  A series of international defaults will put the British economy in troubled waters.

Prime Minister Cameron told reporters, “Contingency plans need to be put in place and the strengthening of bans, governance, firewalls, all of those things need to take place very fast.”

The G8 will move from Camp David to a NATO meeting in Chicago where Afghanistan will be the central topic. Chicago can expect a rash of protests this week.

According to its mandate, the ECB cannot help banks that are insolvent. This move will force the Greek banks needing assistance to apply with the Bank of Greece for Emergency Liquidity Assistance (ELA). An unconfirmed report indicated that four bans were affected.

Meanwhile, President Karolos Papoulias released a statement declaring that Greeks were withdrawing their funds due to the tenuous political and financial drama. The country is divided whether to stay in the euro zone and abide by the terms of their bailout funding or withdraw from the euro zone and euro currency and default on their stated obligations.

After Tuesday’s last ditch effort to form a coalition government failed, the President named Judge Panagiotis Pikrammenos to serve as interim Prime Minister.  Another national election will be held in mid-June.

On a broader scale, the fate of Greece may mark the end of the single currency for Europe.  The region is deeply divided on the value of austerity versus growth.

The euro zone and European Union members have said that if Greece does not honor its commitments the country will have to stand alone.  This is not what Greeks who have been there and experienced life without the euro favor.  However, Alexis Tsipras, the leader of the radical left’s SYRIZA party has promoted a position that calls for re-negotiations of the terms for existing bailout funding and for Greece staying in the euro zone. If you can believe what you hear, the EU and IMF have vowed this cannot happen.

There is some merit to Tsipras’s plan. He advocates growth.  He appeals to the young voters and older, disillusioned voters who have no work and who have seen the value of their pensions drained.  The strength of his case is the fact that the biggest investors in Greece are France and Germany, the top 2 economies in the region.

The IMF’s Christine Lagarde warned the European Union to choose between giving Greece more time to sort through its political hodgepodge or prepare for the exit of Greece.  This would be a significant loss for struggling France and fragile Germany.

Spain’s Prime Minister Mariano Rajoy said that he wanted to keep Greece in the euro zone. He said that if Greece fell, Spain would be next.  In early Wednesday trading, Spanish and Italian bonds climbed above the treacherous 6 percent yield barrier. The world has heard too much about this region.  Investors are nervous and moving to US equity and bond markets.

Can there be any surprise here? In one of Greece’s most unnerving statements, the former President had to admit that Greece had cooked the books to gain membership into the euro zone.  Their original application was declined.  Greece does not see the world through the same lenses that Germans wear.

Hollande Meets Merkel

France’s new President, Francois Hollande, met German Chancellor Angela Merkel in what promised to be an interesting dialogue about austerity vs. growth.  Merkel was supportive of Nicolas Sarkozy’s run for another term.  That was one area of tension.

But the real tension should have been over their differing opinions about austerity cuts and growth as a means to an end of the euro zone crisis.  Hollande had run on a platform of growth, not austerity.  He had also said he would review France’s trade alliances, which the French feel are not to their advantage.

Hollande said on Wednesday that he wanted to re-negotiate previously agreed upon terms. Hollande said he drew confidence because Germany and France have overcome long odds before.

After their initial meeting, Merkel seemed to soften her rigid posture.  Growth has to feed through the people. That’s why I am happy that we will discuss different ideas on how to achieve growth,” said Merkel.

For more than a year, the euro zone leaders have mnaged to spin their plight.  Chalk Merkel-Hollande up as one more positive spin on what is already a frosty relationship that cou

Pushback from the euro zone has been negative.  Shaken by a lack of confidence in Greece, in the euro zone and in the European Central Bank’s efforts to intervene, investors drove the yields on short-term Spanish and Italian bonds to unsustainable costs.  Italy is not far behind.

The reaction in Greece should not be a surprise.  Even before the May 6 elections, there was strong anti-austerity and anti-euro zone sentiment.  At Monday’s meetings in Brussels, the IMF’s Christine LaGarde stood helpless to intervene.

Greece is not alone in its resistance of the austerity cuts imposed by the troika of regional lenders and euro zone paymaster Germany. At the close of Monday’s business, Greece is well on its way to becoming the first country to exit the euro zone and return to its own currency. There is not only fear that Greece will stagger fragile markets but that other nations will follow suit.

Greece’s failure will be unstructured and send financial shock waves around the globe. Greece is set to exhaust its operating capital early next month.  In a reversal of last week’s show of support, the pressure is now on Greece to form a viable government prior to the next tranche of funds that would meet the country’s debt obligations and provide enough funding to operate.

Suffering from euro zone and Greek over-exposure, exhausted investors are expecting the worst.  If Greece is separated from the euro zone, there is no evidence that the country can support itself and emerge from a devastating five years of recession and years of irresponsible spending.  With no prospects of increasing GDP, it appears the powers that be appear to choose confrontation with no options.

This is high stakes chicken. Investors are unimpressed.  It is one thing to be courageous but quite another to be foolhardy.  The scars of a Greek failure will be deep-rooted.

To create a functional coalition, Greece needs the approval of one of the two left parties.  SYRIZA is the strongest party and the largest left party.  It refused to attend Tuesday’s last ditch efforts.  The other left party refused to attend if SYRIZA did not attend.

German Chancellor, Angela Merkel has been a force throughout the euro zone crisis. Merkel has suffered her own political disappointments lately.  Chancellor Merkel could well become the next political leader to be felled by the euro zone contagion. Merkel lost her one vote majority in parliament over the weekend.

On Monday, Merkel brought the possibility of Greek default and Greece’s exit from the euro zone to light.  Merkel is the strongest advocate of austerity because that is the will of the German taxpayer.  Merkel announced that a Greek failure could occur.  She deemed it unlikely that Greece would not honor their commitments but she was not convincing.  If Greece receives another tranche without compliance, it will most likely tarnish the euro zone’s loudest voice.

The resounding voice of a 70-year old one-time Greek pharmacist, Maria Kampita, told Reuters, “We have to stay in the euro. I’ve lived the poverty of the drachma and don’t want to go back.  Never!  God Help Us!”

Against the USD, the euro fell sharply to four month lows.

Rajoy has plenty of skeptics.  Spain’s banks have borne the brunt of the country’s financial plight. With sinking deposits and bludgeoning toxic assets, Spanish banks are holding more than $238 billion in bad loans.  Banks have resorted to renting or selling properties at historic lows to create movement in a stale market.

The euro fell to a 3.5-year low. Entering Thursday’s fray, the euro has lost ground on 8 consecutive days.  The euro rebounded lightly from the intra-day low of 1.2910USD.  Against the yen, the euro lost 8 percent, settling at 103.24 yen.

In Greece, neither pro-bailout parties nor anti-bailout factions have been able to construct a collation to rule. The bottleneck will result in another election.  Despite the tension, the European Financial Stability Fund (EFSF) agreed to advance 5.2 billion euros to the struggling nation.  4.2 billion euro will be distributed in June.  These finds will permit Greece to meet its obligations and to continue government operations.

In a recent poll, the majority of Greeks want to preserve the euro.  However, there is strong sentiment to overturn the austerity programs the region has forced upon the country.  Meanwhile, Germany is standing form that if Greece does not comply with the workout structure, there can be no more funding and the country will have to return to its national currency, the drachma.

In France, new President Francois Hollande vows to grow the economy out of recession rather than implement deep austerity cuts.  The Socialist is scheduled to meet with Germany’s Chancellor Angela Merkel on Friday for what should be an interesting initial meeting.  France has reneged on its austerity stance in favor of more government spending programs designed to stimulate employment.  During his successful campaign, Hollande insinuated that, if necessary, France would stand on its own economic feet and leave the euro zone. Such a move would signal the end of the 17-member alliance.

Hollande may find more support than he expected.  The trend in the region is to gradually implement debt reductions with a keen eye on any growth opportunities.  The continent is in a virtual stand down in terms of employment and growth.  Young workers have been especially hard hit during the downturn.  Most Euro zone nations are in prolonged recessions and have watched housing markets lose up to 70 percent of their value.

It is a rocky time on the continent.  One way or another change is coming.

Both results bode poorly for the success of austerity programs insisted upon by Germany, the European Central Bank and the IMF.  The message from Greece not only threatens the country’s promise to comply with deeper austerity cuts but may put in motion the country’s withdrawal from the euro zone and quite possibly a return to a national currency.

In France, Hollande ran on an anti-Germany platform that promises to review the trade agreements and pledges that the conservative Sarkozy had actively supported. While Hollande, a newcomer to the upper echelon of political office, promised measures that favor growth over austerity.  Sarkozy supported austerity cuts and implementation of a new sales tax to boost revenue.

Liberals will be watching how Hollande treats the unpopular the new sales tax.  In an election that attests to the depths of public dislike for Sarkozy, the three point margin of victory was dependent upon assistance from unlikely sources, including the far-right, where Marine Le Pen garnered 17.9 percent in the first round of the elections.  Centrist Francois Bayrou gathered 9.1 percent of the popular vote in the first round.  Both candidates declined to support Sarkozy, encouraging their followers to get behind the challenger.

Hollande’s victory assures France of its first socialist president since Francois Mitterand who won the 1981 election.  Hollande also looks to fare well in next month’s parliamentary election.  The Socialist Party looks to lead a coalition government that will have a clear majority at every level of government, including parliament.  Hollande, who consistently appealed to “Mr. Normal,” said he would contact German Chancellor Merkel on Sunday evening.  He expects to meet Merkel in three days. At stake will be the future of the euro zone and Germany’s heavy-handed advocacy of steep austerity cuts that have served to hamper any semblance of growth in the region.

In Athens, the post-election temperament was celebratory. Greeks feel the fiscal conservatives have cast undue austerity programs on the population an especially the middle class who have suffered pay decreases, pension losses and prohibitive increases in education.

The Greece elections put the possibility of bankruptcy on center stage. The conservative PASOK party that won 44 percent the vote in 2009 captured a dismal 14 percent.  The Left Coalition only held 5 percent of the vote in 2009 but this time around mustered second place at 15.1 percent.  The New Democracy won the election with 20 percent but the success of the Left Coalition and there young leader, 37-year old Alexi Tsipras calls into question tenability of the pro-bailout parties to control the Parliament.

Following this election, New Democracy and PASOK stand united in support of the terms of the euro zone bailout.  However, New Democracy and PASOK only gained 24 percent of the vote.  All other parties oppose the bailout terms.

There is little time to put a pro-bailout coalition together.  To receive the next tranche of funding, Greece must submit a plan to further cuts amounting to 11 billion euros.  Under the Constitution, the current Greek President, Karolos Papoulias gives the party with the most votes three days to construct a functional government.  If the New Democrat initiative  fails, the party with the second most votes, the Left Coalition has an opportunity to build a majority rule.  If no agreements are made, another election will be held in about three weeks.

This series of events is precisely what private and public investors have feared. But, underneath all this pressure, it appears the euro zone may have to rely on financial support from outside the euro zone and beyond the IMF.  In essence an outside investment would have to be made by nations with the most to lose from a euro zone collapse.

While BRIC nations and the US have been hesitant to commit funds to the region, they may have little choice.  Europe is the biggest importer of Chinese goods and is a valued importer and exporter of US goods.  In an election year, it would be difficult for the US to approve loans to Europe, a region in the midst of political upheaval and lingering recessions.

The April fall of the euro by 0.8 percent seems more realistic. The currency finished April with its worst monthly performance since December 2011. The rise of the euro is based on unsettling economic developments in the US.  Data released on Monday lent to concerns about the strength and depth of the US recovery.  Poor consumer sentiment and disappointing manufacturing data from the Midwest caused a lowering of GDP projections to 2.2 percent.

Both the euro and the dollar fell against the yen.  The euro hit 2-weeks lows against the yen as the US fell to 2-month lows at 79.10.  In anticipation to Tuesday’s meeting of the Reserve Bank of Australia, the AUD fell 5 percent to $1.0418 USD.

In the US, equity markets look for relief from the Federal Reserve, but several of the Fed Governor’s have been vocal in dissent of a possible QE3 stimulus package. The demand for US exports has been diminished by the crisis in Europe, the USA’s largest importer.

Spain Fighting The Inevitable

Last week, S&P lowered Spain’s credit rating to BBB+, regarded as generous by many investors.  On Monday, the axe fell for 9 of the country’s 10 largest banks that were lowered to junk rating.  Spain has pushed for consolidation of the country’s banks.  The result of this has put undue pressure on the 10 banks.

The country’s banks have taken on large pools of distressed and defaulted assets and are finding dwindling deposits and skeptical investors.  The country’s banks are the largest holder’s of sovereign debt. 

Greece was spared because the region’s two largest economies, France and Germany, were heavily vested in the struggling economy.  Spain does not have that luxury.  The only elements that can help Spain are the continuation of the ECB to purchase Spain’s debt.  Technically, Spain does not meet the IMF’s stringent requirements.  Spain’s Prime Minister and his cabinet remain steadfast that Spain does not need outside support.

Without a rescue plan, the question is no longer will Spain default but rather when will Spain default. The populace wants change and a loosening of the austerity programs that are shrinking GDP.

A Monday report regarding Spain’s 24.4 percent unemployment rate eerily resembles US unemployment during the Great Depression in the 1930’s.  A study of the US unemployment rate in the 30’s suggests that Spain has not seen the worst.   Since July 2007, Spain’s unemployment rate has been a vertical climb without any plateaus of relief.

There appears no relief for Spain.  Unlike Greece, Spain’s default could easily be unstructured. This event may trigger a domino effect for nations like Portugal, Ireland and Italy. The European Stability Mechanism (ESM) is underfunded to meet these cumulative needs.

Spain’s ten-year bonds are yielding 6 percent, an unsustainable rate. While the country has implemented austerity cuts, they appear too little, too late.

France And Greece

Two key elections this week may shape the trajectory of the euro zone.  Incumbent French President Nicolas Sarkozy is a distinct underdog to keep his job.  Socialist Francois Hollande is the favorite and has run on a platform calling for reform in the euro zone treaty.

In Greece, the outcome to the elections is not clear.  However, there are undertones that Greece will not comply with its bailout agreement deemed unacceptable by the citizenry.

Austerity Programs

What has been increasingly apparent is that austerity cuts alone do not work.  The better formula for growth involves well-considered cuts and support by the ECB and IMF.  These loans are not quantitative easing, which would be the best way to proceed.  However, the ECB funds are low interest and fairly loose terms.

Austerity cuts only address one side of the problem.  Economists advocate a balanced approach that can lead to growth, the most important component in a recovery. The euro zone’s paymaster does not see it that way.  Germans have difficulty funding poorly administered economies.

No matter how you slice the pie, euro zone’s recovery must have a path for growth.  If Spain, or any other euro zone nation, were as focused on growth as they are on austerity, the economy would have broader appeal to investors.  There is no way standalone austerity cuts can accomplish the job.

The other top rating agencies, Moody’s and Fitch, do not have the same opinion as S&P. The two credit rating services have stated that Spain has the “strong payment capacity.” While Spain’s rating is not considered “junk” status, it is considered risky.

The Prime Minister and his cabinet insist that they can accomplish their budget goals with austerity measures. However, Spain’s populace is resisting the austerity program. Unemployment is now at 24 percent and expected to increase. Retail sales were down in March for the 21^st consecutive month. Adding to the problem, the loss of employment has caused billions of euros in lost tax revenue. With 365,000 unemployed workers in the first quarter 2012, Spain has lost more than 950 million in tax revenue.

To compensate, Spain has increased the value added tax (VAD). Spain is suffering its second recession in the past three years. With declining GDP and low levels of consumer confidence, the future looks bleak for Spain and its neighbors. Romania and Czechoslovakia are the newest center stage regional economic disaster areas.

On Thursday, Spain’s Economy Minister, Luis de Guindos, projected GDP growth of 0.02 percent in 2013 and a bold 1.4 percent in 2014. Spain has already reduced 2012 spending by 42 billion euros in 2012. Like many of the euro zone projections, it is difficult to ascertain upon what figures the Economy Monitor is basing his projections. But, Spain needs investors and the cabinet is on message as the country looks for financial support.

Another initiative implemented by Rajoy, who assumed office in December, calls for the foundation of a holding company where failing real estate loans will be centralized. This action follows consolidation of the country’s banks. The existing banks have aggressively managed their toxic assets but the country’s banks are over-burdened with debt as deposits shrink an withdrawals decrease.

S&P made it clear that austerity was not enough to stabilize Spain’s economy and the country’s banks. In a message to the entire euro zone, the credit agency echoes the call by the ECB that the region must adopt and implement uniform standards and action plans as a means to a better outcome.

Andrew Lim, an analyst with Esprito Santo in London, says that Spanish banks are holding the largest amount of toxic loans sine 1994. He suggested that a 53.8 billion euro buffer was about half the amount needed for the banks to ride through the storm ahead. Spain needs another immediate 20 billion euros to consolidate three more banks. The government is considering the issue of bonds secured by future contributions, but this seems an unlikely remedy.

While Portugal, Greece and Ireland are in line for support from the European Stability Fund (ESM), euro zone officials are not optimistic about help for Spain. Spain has not complied with the standards set by the IMF or the ECB.

The real issue here is the impact of the severe austerity cuts upon a nation’s economy. The consensus is that the penalties of austerity outweigh the advantages of some form of monetary easing.

The perfect model for this debate is Romania whose government is in the midst of a political and economic rebellion. Prime Minister Mihai Razvan Ingereanu has been in office for two months. His reign received a lack of support in a vote of confidence on Thursday.

Romania is the European Union’s second poorest nation. Ingereanu has launched a wave of austerity cuts that have the country reeling. The lack of confidence leaves President Traian Basecu with the duty of proposing a new Prime Minister. Victor Ponta is the probable replacement.

However, the IMF, which has already made two loans to Romania has stated that they will not provide further funding until the political situation is resolves and the budget cuts are enacted. This could take several months. Once again, the euro zone impacts every other market place and there is growing sentiment that would suggest this single currency is in jeopardy.

 Dutch Prime Minister, Mark Rutte, resigned as the Dutch Coalition submitted their collective resignations to Queen Beatrix.  The resignations are the result of a split with the populist Freedom Party, which had supported the coalition until the recent austerity legislation.  Queen Beatrix has requested that the coalition continue to serve until such time as new elections can be held.  That may not be occluded until late Summer.

The Dutch crisis preceded the results of the first round of French presidential voting.  The biggest winner in the surprising elections was not the winner, Socialist Francois Holland, or incumbent Nicolas Sarkozy, but Maine Le Pen, the far right activist who succeeded her father as head of the National Front. Le Pen capture a sunning 19 percent of the popular vote.  Although the margin was not enough to qualify for the two-way runoff in the next round, it assured the Front Line of a significant voice in the upcoming second round.

It is projected that Sarkosy, the first incumbent to not win the first round of elections, would be the more significant benefactor of the Le Pen followers.  However, Le Pen has repeatedly attacked Sarkosy for enabling the euro zone crisis to affect the country’s economic stability. 

Both Le Pen and Holland have been critical of Sarkosy’s willingness to implement severe austerity cuts to meet the euro zone’s budget restrictions.  LE Pen is well positioned to increase her coalition’s influence.  Her platform stresses returning a national currency and terminating France’s subscription to the euro zone.

The magnitude of the Le Pen, Holland vote is emblematic of the anti-establishment posture that is sweeping across the euro zone.  This sentiment clearly jeopardizes the investors in the Greece bailout.  With Greek elections scheduled for May 6^th, there is real concern that the new government will not comply with the terms of the bailout.

As other euro zone countries have discovered, the austerity cuts are too large and too quick.  Most nations implementing these restraints will be unable to grow economically.  Although not strictly a quantitative easing mechanism, the participation of the ECB comes about as close as possible to quantitative easing. 

To further underscore the euro zone crisis, Spain has rejected further austerity cuts.  Instead, the government has sided with its populace that is opposed to further constraints.

The news does not get any better.  In addition to all the negativism about the euro zone austerity and lack of growth, Germany reported its lowest manufacturing data in three years.  The euro zone paymaster looks to be a big loser if the Dutch, Greece, Spain and France reject austerity programs.

The biggest political loser could well be Germen Chancellor Angela Merkel, the driving force behind the euro zone negotiates to date.  The Dutch are a favored trading partner with Germany.  As one of the few euro zone members with a triple A credit rating, the economic differences ion the Netherlands could well result in a lowering of The country’s credit rating.

In early trading, the euro gave away some ground to the dollar, settling at $1.3129, down 7 percent over the weekend.  ING projects that the euro will fall to $1.20 by the end of the second quarter. That marks some serious volatility.

To cut to the chase, the continuation of the euro zone is going to boil down to which nations are willing to comply with the budget cuts necessary to contain spending to 3 percent of GDP.  It is growth versus austerity and while the politicians may talk the talk, the people have the power and they seem poised to act at the polls.