It’s no wonder the Germans are comfortably relaxed.  GDP growth this year looks to hit 3%.  Unemployment is 6.5%, down from 7% a year ago.  Germany’s exports shot up by 10.5% in September compared to the same month last year.  Merkel’s coalition voted to cut taxes by more than $8 billion, but that will hardly affect German state income — an accounting error was caught that provided a $76 billion dollar windfall to state revenues!

A state-appointed commission of economic experts presented Merkel with a report today predicting a slow-down in Germany’s growth next year to less than 1%, but that is being brushed off as a teutonically dour and conservative estimate that needn’t trouble anyone right now.

But look around — On October 26 European leaders, after wrestling for days, produced the “Great Agreement that would save the Euro.”  Two weeks later, the prime ministers of Greece and Italy have both resigned, launching both countries into uncertainly; and Italy’s borrowing costs shot up above the dangerous 7% mark, making it look like an Italian default — the disaster all this was crafted to avoid — is now knocking on the door.  European bourses fell 2%, and in the US, which had more time to digest the news, the Dow fell by nearly 400 points and the S&P 500 and Nasdaq both fell more than 3.5%.  So how’s that working out?

All the austerity packages in the world will not fix the debt situation in Europe without growth.  And if only Germany has growth, but is not willing to lend or pursue expansionary fiscal policies, the jig will be up soon.

There is still too much unknown — will the haircut on Greek debt trigger Credit Default Swaps?  Who holds the paper that will end up taking the losses, and how far will taxpayers in Europe go to bail out European banks or insurers?  Will Italy regain growth to help it manage and pay its debts?

Amazing how the markets applauded the flimsiest of excuses for good news; what is not surprising how they reacted when reality sets in.  That is unfortunate, as there will likely be more harsh reality to come.