September 12th Looms Large for Germany
The German economy is undoubtedly the powerhouse of Europe. As a result, an understanding of the developments within Germany can offer a strong indication of the path that the rest of Europe is likely to take. Until recently, Germany stood as a bastion of sound money against those Keynesian led regimes in the developed nations that favor continual currency debasement as an economic panacea. Throughout much of the past decade the German monetary bias was upheld by the Frenchman Jean Claude Trichet, the president of the European Central Bank. During Trichet’s tenure, the ECB’s policies so closely mirrored the philosophy of Berlin that many considered him to be German in everything but accent. But the arrival of the Italian central banking technocrat Mario Draghi as head of the ECB, and the changing tone from Germany herself, indicate that a new monetary era had dawned.
Recently, German politicians, led by Chancellor Angela Merkel, have begun signaling greater comfort with monetary debasement, even while the top bankers at the German Bundesbank remain firmly committed to sound money. All eyes turn now to the long awaited ruling of the German Constitutional Court on September 12th. Simply stated, the Court will rule as to whether it is constitutionally permissible for Germany to finance the debt of other nations. Before it abandons its preference for sound money, German leaders would do well to consider the long term consequences.
The UK and the U.S. were once the two richest nations on earth. Today, having followed Keynesian money debasing policies, they are among the world’s largest debtors with their economies approaching possible deep recession. Indeed, today the U.S. Treasury’s debt exceeds $16 trillion. America has joined Portugal, Iceland and Greece with a Treasury debt larger than its GDP. Nevertheless, the Anglo-Americans have established a considerable following of central banks around the world that are engaged in monetary debasement.
Having experienced the ravages of the 1920’s Weimar economic collapse, Germans have been dedicated followers of the Austrian School of sound money. As the leading exponent of sound money, Germany has garnered sympathy with Switzerland and the Netherlands. More recently, resource-rich nations such as China and Russia have joined this loose grouping and are calling for a replacement for the U.S. dollar as the international reserve currency.
We have referred repeatedly to the fundamental struggle taking place between the Anglo-American led money debasers and the German led sound money nations. Now, it appears increasingly that a major split is occurring within Germany itself. This has the potential to set the world on a downward spiral towards a hyper inflationary currency crisis.
Facing the difficult task of calling for continued austerity while holding together a tenuous political coalition, Chancellor Merkel looks ready to cave into expediency. Facing external political pressure from Anglo-American led Keynesians, Merkel appears ready to ask the German public to finance the rescue of their less successful Eurozone partners. It could also be that German politicians see this expensive course as a costly but rewarding path to their eventual political control of the European Union.
Unfortunately for Merkel and Draghi, the powerful Bundesbank, led by Jens Weidmann, does not agree that the benefits of debasement outweigh the risks. In particular, Weidmann objects to Draghi’s preference for American style quantitative easing of Eurozone bonds. He believes, quite correctly, that purchases of sovereign debt of insolvent nations would put at risk the savings of German citizens. In addition, he has indicated that the policy would be in direct contravention of the European treaty.
If the German Constitutional Court rules against German rescue plans for other nations, the Bundesbank and all believers in sound money can breathe again. However, it could imply an urgent and possibly terminal threat to the euro. Likely that would imply considerable short-term monetary volatility involving a short-term price spike in the U.S. dollar and a longer-term increase in precious metals prices.
Given the almost unprecedented monetary and economic implications and the resultant wall of Keynesian political pressure being brought to bear, most observers may judge that the German Court will succumb under the cover of some form of legal camouflage language. However, it is important to remember that in the past, the German Constitutional Court has not shown itself to be a political pushover. Nevertheless, this time its decision could be literally earth shattering. It represents an awesome responsibility.
John Browne is Senior Market Strategist at Euro Pacific Capital.
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