A new Europe.

So after another week of dismal markets the outline of a solution for Europes woes finally becomes clear.

1) Greece will be allowed to go bankrupt in an orderly manner . In practice this means that French banks will need to be hastily recapitalised in order to absorb the losses on their investment portfolios. Expect a flurry of announcements to this effect over the coming week. Between them G20, the EU and the IMF will have to raise a firewall of around 2 trillion euros.

2) In order for France to retain its triple A rating there will need to be cuts in government spending . The rights to health and pension benefits that exist today are unaffordable and were never meant to be universal. Theses cuts are impossible to implement ahead of the Presidential election next year but implemented they will need to be. Spain has already begun the process, the UK is well advanced, Italy continues to deny the obvious . The pain there will be all the greater when it comes . Put simply, the european electorate face a decade of reductions in their 'rights' and wealth . Even supposedly virtuous Germany has government debt equal to 82% of GDP - up from 39% two decades ago . German banks share many of the weaknesses of their French counterparts.

3) Governments will accept higher inflation . This makes it appear as if economies are growing while at the same time boosting nominal tax receipts.

The questions posed by these changes are enormous :

• How do governments explain to their citizens that there is no more money left ?
• How will Britain react to a two speed Europe in which eurozone economies are increasingly centrally run ? If a referendum was held on the issue would the country really vote against staying in the EU ?
  
• How does Italy try to reduce debt levels from its economy destroying 120% levels ?
• How are jobs for the young to be created in a world that faces a decade of stagnation ?
• With the financial services sector due for tighter regulation and overall contraction what will replace the tax revenue this component of the economy generates ?
• What happens when everyone tries to generate lower exchange rates to to protect their domestic economies and boost exports?
• How do French politicians sell Germanys ascendancy to their own electorate ?
  

Markets are set to heave a collective sigh of rlief that the Greek problem has been ringfenced. The investment , social and political terrain going forward will be very different .