Europe unravels

In the space of just a few days, Europe threatened to unravel. On May 6, voters in France and Greece elected new leaders, rejecting attempts to impose what most analysts say are necessary austerity measures. The Dutch prime minister tendered his resignation a week earlier after his country failed to agree on budget cuts.

But on the Monday after the French and Greek elections, the U.S. markets-after opening down-rebounded into positive territory. Why? In part because the results were expected, and the markets had some of the downside already baked in. The S&P 500, for example, up 11 percent in the first quarter, was flat in April. The Dow Jones Industrial Average at one point was down about 500 points from where it started in April. These moribund performances were despite strong earnings reports from many companies.

But the real reasons the markets did little more go beyond a purely technical analysis. In the case of Greece, lots of Euro watchers believe the country is unsalvageable, and a speedy demise is preferable to a slow descent into chaos, a word which-appropriately in this context-comes from the Greek khaos, which means "gaping void."

France is more complicated. Outgoing French President Nicolas Sarkozy was so chummy with German Chancellor Angela Merkel-and so agreeable to the austerity measures she negotiated-that Sarkozy's critics derisively called him "Merkozy." Their relationship rankled the French, and the election of Socialist President François Hollande (left) may be more about his vow to stand up to Germany than it is an affirmation of socialist policies.

Hollande, indeed, may be pushing Germany back with one hand, but he's reaching out with the other. He announced even before his inauguration a trip to Germany to meet with Merkel to renegotiate austerity measures. Merkel, for her part, said the day after the election that she "does not negotiate what has already been agreed."

A complete renegotiation may not be necessary if Merkel and Hollande find common ground. Hollande wants to reduce debt by raising the top tax rate to 75 percent. Merkel wants more cuts. But they both know that debt reduction is essential. They agree, too, that reducing debt can't happen without growth. And that may be why the markets didn't panic after the election. Almost everyone agrees that having the leaders of the two largest economies in Europe discussing a strategy for growth is a good thing.

In the end, the hard reality of mathematics will win. France has to cut spending, and not just because Germany says so.

Good failures

Four years after U.S. taxpayers bailed out Wall Street and Detroit, the expression "too big to fail" is now in the cultural vocabulary and even has its own acronym: TBTF.

Few people have more clout on the issue of TBTF banks than Dallas Federal Reserve President Richard Fisher. He's a former Democrat who now has a reputation as a conservative, and he's opposed to more government regulation of the financial services industry. He argues that the financial services meltdown was an unintended consequence of government interference in the financial markets.

Fisher's views made him one of the hottest speakers in Los Angeles in early May at the Milken Institute's Global Conference, an event that is rapidly becoming the "go-to" event for free-market-leaning business leaders. If the '80s was the "greed is good" decade, Fisher suggested that the 2010s should be the "failure is good" decade.

He said business failure is a self-cleaning mechanism for an economy. The possibility of failure efficiently puts a price on risk and capital. The fear of failure teaches prudence. His bottom line: Government bailouts of TBTF institutions are contrary "to the very ideal of American capitalism." -Warren Cole Smith