Why are EU leaders so happy? Is it because they were at the edge of the “cliff’ and they were able to come to an agreement on a framework that they believe will save the EURO and the EU? This framework includes a recapitalization of the banks; a "voluntary haircut" of 50 percent on Greek debt holders; and, a leveraging of the EFSF to about $1 trillion.

Guess what? Bond markets understand what is happening. They know that this is simply a statement of good intentions. Bond markets want to see if the proposed framework can actually be implementd. So far they have been less than optimistic. Every aspect of the plan is in doubt. How will the banks actually recapitalize? Will they reduce the size of their balance sheets?Is the write down of debt voluntary or involuntary? Who will put up the collateral for the EFSF special vehicle? Finaaly, where is the longer-term commitment to institutional reform and fiscal integration?

Most important where is the economic growth, that is assumed in this plan, going to come from? It is claimed that the “voluntary haircut” will reduce the debt to GDP ratio of Greece to 120 per cent from an expected 180 percent over a period of 10 years. Someone should tell EURO policy makers that a ratio consists of a numerator and a denominator. The denominator in this case is Greek GDP, which is not going to be increasing for some time. Just recently Germany’s leading economic institutes cut their forecast for Germany growth from 2.9 per cent in 2011 to just 0.8 per cent in 2012 as a result of the EURO zone debt crisis. Regrettably they also recommended that Germany should not relax its austerity programme. Demand and output is contracting in Europe and there is no way the Greek debt burden will be held to 120 per cent which, even if it could, is not sustainable. 

This crisis is far from over no matter how hard the EU and the G-20 try to put an optimistic twist on it in Cannes. What we are seeing is a continuation of policy and credibility melt down for the EURO and even possibly the G-20. 

Prime Minister Harper may be cautiously optimistic about the EURO and in public perhaps he has to be. However, in private we would suggest he start planning on the “worst” outcome not the hopeful “best” outcome.