In very early Asia, participants responded to Draghi’s sovereign bond buying hints, and Merkel’s seeming willingness to let Greece leave EMU by send the euro to a low of $1.1865, according to Bloomberg. The thin conditions exacerbated the move, but the single currency has not been able to resurface above the $1.1980 area since. Â
Softer than expected German state CPI figures warn of a national harmonized rate of 0.1%-0.2% from 0.5% in November.  The risk that Germany slips in to deflation may indeed see the Bundesbank’s opposition to new asset purchases ease. This has been one of our interpretative points. One of the difficulties in coordinating policy in the euro area was the divergence of economic performances. But now with Germany having lost some momentum, and now is on the verge of deflation, it may sing a different tune. Â
 Merkel’s signal that Germany could cope if Greece decides to leave EMU raises the ghost of Lehman.  After Bear Stearns failed, many thought that investors had adjusted positions to cope with the higher risk environment that had revealed the vulnerability of large institutions.  As we know now with the benefit of hindsight, this was not the case.  Â
First and foremost these are negotiating positions. Officials had indicated they were prepared to ease debt servicing for Greece after it had reached numerous objectives, including a primary budget surplus. This has been achieved. Both sides can play hard ball. Moreover, our understanding of the relevant treaties is that there is not mechanism to eject a country from the monetary union. Â
The latest Greek poll (Ross) showed Syriza with a 3.1 percentage point lead over the New Democracy, down from 3.4 in mid-December. Even with the 50 seats that go to the party that gets the most votes, it is not enough to give it a majority. Moreover, 74% of those surveyed want to stay in the monetary union. A vote for Syriza is not a vote to exit EMU, even if that is what Samaras and some European officials, like EC President Juncker suggest. Â
