Eye on the Market I June 18, 2012 J.P.Morgan What could go right in the world, surpassing the low expectations for just about everything? A postscipt on Beijing European Safari. I didn't spend much time on Greece last weekend. Think about it this way: if the Eurozone's survival hinges on Greece staying in or not, a country which the Euro has rendered economically bankrupt and politically balkanized, the Eurozone may be even more fragile than it is suspected to be. A bigger preoccupation right now is Spain, where unemployment is 24% despite the highest levels of labor shortages in Germany in 25 years. This year has been tough in Spain: its government bonds only rallied when the ECB provided money to Spanish banks to buy them (the Cyrano effect'). Once this ended, Spanish bond yields soared again. Spain, along with Italy and France, then began to barrage Germany with demands to "share the wealth" via region-wide deposit guarantees, more ECB purchases of government bonds, more flexible ECB lending conditions for banks, joint and severally guaranteed Eurobonds, a European Redemption Fund which is more or less the same thing as Eurobonds, and higher inflation tolerance in Germany. It's like watching a group of hyenas trying to bring down an elephant. At this point, I would put even money on the hyenas succeeding, as Merkel seems to be tiring of the fight. Spain, its banks, the ECB and the Cyrano effect What kind of monetary union is this? Billions of Euros Percent Percent 30 6 10% Spanish unemployment 25% ECB•financed purchases°, sow. 9% 25 Bonds by Spanish ban ks (LHS) 22% 20 SP 2yr sow. yield (RHS) 5 7% German firms reporting labor shortages as a factor 19% 15 6% limiting production 4 5% 44— 16% 10 4% 13% 5 3% 2% 10% 1% -5 2 0% 7% Oct 11 Nov 11 Dec 11 Jan 12 Feb 12 Mar 12 Apr 12 May 12 Jun 12 2001 So urce: ECB, Reuters. Bank bond holdings as of Apti12012. 2003 Source: European Commission. 2006 2009 2011 Recent e