Germany Loses to Italy, Again
June was not a particularly good month for Germany. First, she suffered a loss to Italy in the semi-finals of the European Cup soccer tournament. Then, she suffered a more significant blow when Italy’s Prime Minister, Mario Monti, extracted important concessions from German Chancellor Angela Merkel at the European Summit. A loss on the soccer pitch can put a dent in the national ego. But a loss on the field of finance can be far more serious.
The deal made by Merkel puts at risk Germany’s hard-won financial treasure and could earn her the permanent ire of her people. After months of resistance, many have wondered why Merkel finally gave in. Some believe that she was persuaded by the exposure of German banks to Eurozone sovereign debt. Others credit the warnings of the Bank for International Settlements (BIS) that may have persuaded leaders of Eurozone nations to yield sovereignty in return for financial support. But whatever the motivation, Merkel is moving into dangerous political waters.
Poll after poll makes it perfectly clear that the German people have no interest in exposing their hard-earned savings to the ravages of unending bailouts and currency debasement. In addition, the German Constitutional Court has backed popular opinion in its opposition to Germany accepting ‘undemocratic’ EU control over the German people. Indeed, the Court has postponed its approval of German participation in the key European Stabilization Mechanism rescue fund.
German leaders, however, have been seeking to translate their country’s economic power into political power over the entire Eurozone.
For the German people, the purchasing power of their painstakingly accrued national savings is not worth sacrificing for the advantages of economic empire. To this end, Germany has stood alone within the EU in a massive, but seldom reported, struggle for a sound currency. In this, Merkel has faced a phalanx of nations that, dominated by the Anglo-American led Keynesians, have fought for a debased euro currency. Up to now, Germany had succeeded in establishing the European Central Bank (ECB) as a sound money central bank.
These factors explain Germany’s reluctance to give in to appeals for funding from troubled Eurozone countries which wanted cash but were unwilling to surrender any national sovereignty. The recent price of this stand has been a Europe in recession.
In order to keep alive the Franco-Germanic ideal of a European Union, German banks have become ‘stuffed’ with billions of euros worth of the questionable debt of fellow Eurozone nations. Germany therefore has an interest in protecting these debts. On this, the Bank of International Settlements last month issued a strong, revealing and important statement. It held that, “central banks are being cornered into prolonging monetary stimulus as governments drag their feet,” adding that these stimuli are merely “palliatives and have their limits.” The BIS then warned that, “As the benefits of extraordinary monetary easing shrink and become less certain, the risks of expanding central bank balance sheets [currently standing at $18 trillion] are likely to grow.”
In short, the BIS told intransigent leaders that, to avoid the unpleasant repercussions of possible massive civil unrest and broadening poverty within their societies, they must surrender some of their sovereignty in exchange for funding. Our suspicion is that undisclosed assurances of such a move by southern PIGS countries may have been given to Merkel.
The result was that certain Eurozone bailout funds were authorized to recapitalize Eurozone banks directly. Of course, this includes German banks. However, the numbers are most probably far too small to enable a banking recovery in Europe. For example, the roughly $600 billion in combined Eurozone rescue fund commitments is dwarfed by the $3 trillion of toxic assets held by Spanish and Italian banks. On the other hand, the disclosed agreement does pave the way towards pan-European banking controls. This may indicate the initial steps of sovereignty surrender playing directly into German hands.
If Merkel is successful in selling the new package to her parliament and voters, and provided that a covert agreement was in fact reached on a progressive surrender of sovereignty to Germany, the new package could succeed. Absent these two critical conditions, last week’s agreement should not be seen as anything less than a victory for the printing press.
John Browne is Senior Market Strategist at Euro Pacific Capital.
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