With fiscal time bombs ticking in both Europe and the United States, the pertinent question for now seems to be which will explode first. For much of the past few months it looked as if Europe was set to blow. But Angela Merkel's refusal to support a Federal Reserve style bailout of European sovereigns and her recent statement the she had no Hank Paulson style fiscal bazooka in her handbag, has lowered the heat. In contrast, the utter failure of the Congressional Super Committee in the United States to come up with any shred of success in addressing America's fiscal problems has sparked a renewed realization that America's fuse is dangerously short.
Chancellor Merkel has been emphatic that European politicians not be given a monetary crutch similar to the one relied on by their American counterparts. Her laudable goal, much derided on the editorial pages of the New York Times, is to defuse Europe's debt bomb with substantive budget reforms, and as a result to make the euro "the strongest currency in the world." Much has been made of the poorly received auction today of German Government bonds, with some saying the lack of demand (which pushed yields on 10-year German Bonds past 2% – hardly indicative of panic selling) is evidence of investor unease with Merkel's economic policies. I would argue the opposite: that many investors still think that Merkel is bluffing and that eventually Germany will print and stimulate like everyone else. It is likely for this reason that yields on German debt have increased modestly.