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Nothing – especially not bad things – can happen in the euro zone so long as Germany is in election mode. That is the happy news for officials meeting in Brussels on Monday to decide whether to pay out another €8-billion ($10.9-billion) to Greece. This time last year, the euro zone was shaken by political and market events that sent bond yields soaring and sparked the "whatever it takes to save the euro" stance from European Central Bank president Mario Draghi. Yet political crises in Portugal and Greece have sent barely a ripple through the wider euro zone. Germany's election on September 22 is imposing a great deal of stability. The question is what happens after the vote.
There is no doubt that contagion has lessened markedly. The crises in Greece and Portugal, essentially over coalition squabbles, destabilised local markets in recent weeks but did not disturb Spain and Italy. And those local markets are also recovering: Portugal's stocks have recovered most of the near 7 per cent loss they suffered last week. Greece's 10-year bond yield, at 10.5 per cent, is just a third of where it was at a year ago.
The trouble is that the to-do list for after Germany's election is getting ever longer. Greece's position remains precarious, as its "troika" of creditors – the ECB, the European Commission and the International Monetary Fund – said on Monday. The chaotic bailout for Cyprus will surely have to be revised. Portugal's problems may have put paid to its chances of exiting the bailout next year. Ireland's legacy bank debt has to be addressed.
This agenda will demand, at the very least, a new approach from the new German government (which looks likely to be headed again by Angela Merkel). It will also test the ECB, whose "whatever it takes" stance implies continued activism even as the U.S. Federal Reserve moves in the opposite direction. It could prove highly contagious.