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If you’re still trying to piece together the events of the last 48 hours this note from Nomura might help.  They describe how the collapse of the government in the Netherlands could put increasing pressure on Germany to abandon support for the periphery.  A negative trend here is not far fetched at all.  If Sarkozy loses his re-election campaign the core will likely see increasing support for those who don’t want to continue bailing out the periphery countries.  I still think Germany will hold the line no matter what the costs, but the risks can’t be ignored as they grow.  Anyhow, here’s the Nomura commentary:

“As we reflected in our 13 April report EU: Now is the second summer of our discontent – Act 2, the PvdA has also signalled that it does not support the eurozone’s fiscal compact, Dutch ratification of which is now, we believe, seriously in jeopardy. Although failure by the Netherlands alone to ratify would not in theory spell the compact’s demise – only 12 out of 17 eurozone members need to ratify for it to come into force – it would at best significantly damage the compact’s credibility and at worst encourage other members to follow suit.

Notable in this respect are Ireland, which has a referendum on it set for 31 May; and France, where the Socialist candidate for and favourite to win the ongoing presidential election, François Hollande, has already committed to try to renegotiate the compact (see ‘France: Plus ça change’, Nomura Euro Area Theme, 4 April 2012). Furthermore, a Socialist/left-of-centre win in France’s legislature elections in June could further complicate French approval of the compact; so, shades potentially of the fate of the European constitution in 2005, which was rejected by both France and the Netherlands and subsequently abandoned.

With the compact under threat, in Germany Chancellor Angela Merkel’s domestic challenges surrounding the eurozone crisis are likely to become still more complicated.

Again as we suggested in our 13 April report, she may find herself coming under increasing pressure at home to draw a line under further support for the struggling peripherals should they need it, potentially opening the door to a disorderly default on debt repayments and related eurozone exit.”

Source: Nomura

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