Latvia

Inflation slowed in 24 (of 27) EU nations in April to leave the average EU rate at 1.4% (versus 1.9% in March). Greece entered deflation in March for the first time in 45 years and Latvia consumer prices fell 0.4% in April (versus +2.8% a year ago). This notable plunge, while 'helpful' for the average spender in the short-term, is a problem, as Bloomberg's Niraj Shah notes, sustained falling prices will increase the nation's debt burden. At the other end of the spectrum, Romania and Estonia both have inflation running above 4% and 3% respectively. Of course, none of this serial 'depression' matters, since Draghi has your back and Hollande says "the crisis is over."

The debate about the usefulness of sovereign credit default swaps (SCDS) intensified with the outbreak of sovereign debt stress in the euro area. SCDS can be used to protect investors against losses on sovereign debt arising from so-called credit events such as default or debt restructuring. With the growing influence of SCDS, questions arose about whether speculative use of SCDS contracts could be destabilizing - and this caused regulators to ban non-hedge-related protection buying. The prohibition is based on the view that, in extreme market conditions, such short selling could push sovereign bond prices into a downward spiral, which would lead to disorderly markets and systemic risks, and hence sharply raise the issuance costs of the underlying sovereigns. The IMF's empirical results do not support many of the negative perceptions about SCDS. In particular, spreads of both SCDS and sovereign bonds reflect economic fundamentals, and other relevant market factors, in a similar fashion. Relative to bond spreads, SCDS spreads tend to reveal new information more rapidly during periods of stress, admittedly with overshoots one way or the other. Given the current apparent 'stability' in many nations' bond market spreads, the chart below suggests an alternative way of judging what the credit market thinks - the volume of protection bid - and in this case some interesting names emerge.

Yesterday, we first reported on something very disturbing (at least to Cyprus' citizens): despite the closed banks (which will mostly reopen tomorrow, while the two biggest soon to be liquidated banks Laiki and BoC will be shuttered until Thursday) and the capital controls, the local financial system has been leaking cash. Lots and lots of cash. Alas, we did not have much granularity or details on who or where these illegal transfers were conducted with. Today, courtesy of a follow up by Reuters, we do.  As it turns out, the Russian oligrachs this whole operation was geared to punish, may have used the one week hiatus period of total chaos in the banking system to transfer the bulk of the cash they had deposited with one of the two main Cypriot banks, in the process making the whole punitive point of collapsing the Cyprus financial system entirely moot.

It appears the Cypriots (or more clearly the European leaders) do not appreciate the extent to which Russia has propped up the local economy. “When the Russians leave who is going to stay at the Four Seasons for $500 a night? Angela Merkel?” one wealthy Russian asks rhetorically, as The FT reports, they are receiving a deluge of overseas phone calls from helpful Swiss bankers looking to swoop up the deposit transfers. "The locals should understand: as soon as the money leaves, the people who go to restaurants, buy cars and buy property leave too. The Cypriots’ means of living will disappear," and there are signs that the locals are getting how drastic this situation is, as a large billboard has sprung up at Larnaca Airport with a Russian flag and the words "Brat’ya ne predaite nas!" - "Brothers, don’t betray us!" Many Russian businessmen appear to have one foot out of the door already and are considering whih jurisdiction to move to as they await to see if Medvedev follows through on his threat to dismantle the double tax treaty with Cyprus.

It is not just that there is a monetary union without a fiscal union, but European monetary union itself is incomplete.

Forget Citius, Altius, Fortius ("Faster, Higher, Stronger"), the real Olympic challenge among Europe's nations is Pinguissimam, Ignavissumi, Bibe Maxime (Fattest, Laziest, Drunkest). As WaPo notes, there's nothing like tales of butter-eating, wine-guzzling, yet somehow-still thin Europeans to add to American angst over holiday calories and upcoming resolutions, but while overall Europeans are fairly healthy, a recently-released report by the Organization for Economic Cooperation and Development (below) found that the prevalence of diseases such as diabetes and asthma has also increased — in part because of better diagnosis, but also thanks to underlying causes such as drinking, smoking and eating fattening foods. Here’s a look at which Europeans are most obese, most inactive and drink most (no, it's not the Brits):

"No matter where you stand, no matter how far or how fast you flee, when it hits the fan, as much as possible will be propelled in your direction, and you will not possess a towel large enough to wipe all of it off."

You thought it was tough; it is going to get tougher. You thought that Europe would not affect America and that we lived in some sort of bubble over here; think again. You thought that the liquidity provided by the world’s major central banks would carry us across the divide and intact; keep dreaming. We are at the cross roads...

Gazprom has Europe’s natural gas market in a stranglehold and Europe is attempting to fight back, first with a raid last year on the Russian giant’s offices and then with a probe launched earlier this week against its allegedly illicit efforts to control the EU’s natural gas supplies. The bottom line is that the same natural gas revolution in the US, which was enabled by hydraulic fracturing (fracking), is now threatening to loosen Gazprom’s noose on the EU, and Gazprom simply won’t have it. Let’s not pretend that energy companies are clean and that governments aren’t using them to forward nefarious geopolitical objectives (US multinationals in Northern Iraq, for instance). The point is not to paint Gazprom as the ultimate evil in energy. This is about Europe, and the EU’s “Mommy Dearest” struggle with Gazprom, which is undoubtedly playing an underhanded energy-politics game worthy of the most sinister of accolades.

It seems every week there are new acronyms or catchy-phrases for Europe's Rescue and Fiscal Progress decisions. Goldman Sachs provides a quick primer on everything from ELA to EFSM and from Two-Pack (not Tupac) to the Four Presidents' Report.

Debate between Krugman and the CFR rages on in round 2 on whether currency devaluation created the Icelandic Miracle or Mirage.  

The battle between the 'Austerians' and the 'Keynesians' remains front-and-center in Europe (and elsewhere for that matter). As Sean Corrigan noted recently Frau Merkel is sticking to the only strategy that she can - of insisting that future aid is tied to the construction of budgetary oversight, reduced national sovereignty, and the implementation of labor market reforms - paying lip-service to her nation's unwillingness to pay for what they view as their counterparts' indolence or improvidence. How long this can last is an open guess. Stratfor's Kristen Cooper provides a succinct clip of the state of European Austerity (seeing little progress in reality and in fact a pull-back by Italy and France at the realization that their electorate won't be happy!!). Perhaps, as Corrigan notes, the real lesson is to be had from the Baltics, where 'drastic devaluation' has accompanied genuine 'austerity' - and as a result of this bitter medicine, they are now growing private GDP. As Corrigan sums up, [Austerity as it is being implemented in Europe] is aimed not so much at reinvigorating individual endeavour as at minimizing the reduction in the reach and importance of the state (satisfying neither the Keynesians nor the Austrians) and that is what is self-defeating about such measures.

Everything you need to know about the success of austerity, but were afraid to ask. In a little under 90 seconds, this Borat-inspired cartoon explains "Why so many central bankers, politicians, and pundits admiring 'austerity wonderfulness'?" The answer, perhaps tongue-in-cheek, is because of "Great Latvia Success Story".

One European think tank which has been spot on in its skepticism over the past two years, is OpenEurope. Below they share their views on the next steps for Greece.

Greece is on its way to becoming a "new, critical fragile state," and the ECB and EU will have to keep it on life support for years after it exits the common currency.

An uplifting story of austerity and growth at the edge of Eurozone mayhem.