There were two important news reports out of Europe this weekend.  The first one is a report that Merkel is holding serious discussions about a genuine fiscal union, whereby no nation would be permitted to run a budget deficit without consent of a panel of European finance ministers, plus consent of a new pan-European finance minister for all of Europe.  This is news because it suggests Germany would then back the new Eurobonds, which would be guaranteed by all nations of Europe.  It is very interesting but not very important, because the profligate nations like Greece and Portugal would be surrendering their budget sovereignty theoretically to Europe as a whole but practically to the same nation that produced Hitler.  (While I agree it is unfair to state it so rudely, I believe such rude and unfair thoughts are commonplace in Europe.)

The second important news report is that the finance ministers of Europe have agreed to a bailout of the Spanish banks, not the Spanish government but the Spanish banks.  This is news because the funding arrangement makes it easier to help profligate nations like Spain without violating existing agreements.  While it is also interesting and much more important than Merkel’s discussions about a pan-European finance minister, it is not the most important thing that happened this weekend.

The most important thing was that, for the first time, Europe did something proactive instead of reactive.  Instead of waiting for the bond vigilantes to attack Spain, which they will do after the Greek election next Sunday, Europe has prepared the Spanish banks ahead of time!!

It was estimated that the Spanish banking system needed 50 billion euros, and the finance ministers agreed to put in 100 billion euros ($125 billion).  They finally learned why Hank Paulson, Bush’s Treasury Secretary, asked for a bazooka instead of a BB gun to defend our banking system during our own financial crisis.

While it is still too early to read futures for Monday morning, I expect a happy, bullish market reaction.
In addition to this good news from Spain, inflation dropped in China, making it more likely they will introduce another stimulus.

So . . . Happy Monday!  Enjoy the giddiness of the bull whenever you can, but don’t forget the real solution to the European financial crisis is what exactly Merkel has proposed . . . which few nations can accept.