|
In the early days of September,
financial markets worldwide were nervous. Investors and governments were
waiting for a crucial ruling of the Federal Constitutional Court of Germany,
a ruling that could have triggered the imminent collapse of the world's
second currency, the euro. This past Wednesday, the court ruled that the
German bailout of Greece did not violate the German Basic Law (i.e.
constitution), and investors breathed a collective sigh of relief.
The court's decision paved the way for
the euro and stock markets to rebound strongly and precious metals to fall
back. In addition, there were reports that China would end its series of rate
hikes. By the close, news emerged that the Italian Senate had agreed to an
austerity program. Markets rallied further. Commentators were ecstatic. And,
almost universally, no thought was given to the long-term consequences of these
moves.
I accept that the German court ruling
averted an imminent disaster. But it may ultimately undermine any hope that eurozone can become a healthy currency bloc again.
Europe still has a critical problem with
public debt. Despite austerity programs that push past the tolerance of local
populations, Italy and Greece still have debt-to-GDP ratios of over 100%. The
eurozone's core countries, France and Germany, are
above 80% on that measure. It is clear to me and my colleagues at Euro
Pacific that debt at these levels will mean partial default.
But the manner of that default can be
either honest or dishonest: either bondholders are told what the losses will
be or the currency is devalued to pay back the nominal obligations. The EU
elites are pushing for the dishonest option, and it seemed like the German
court ruling would be a victory for monetary union - for the purposes of
transferring debt to the Union and then using inflation to reduce it. This
route would prevent any breakup of the euro in the short-term, but turn the
currency into another fiat basket-case in the mid- to long-term.
However, for hard-money adherents, the
German court issued two additional rulings that leave a shred of hope.
First, the court ruled that any future
German financing for the purpose of bailing out another nation would require
the prior agreement of the German Parliamentary Budget Committee.
Second, the German court issued a press
release emphasizing specifically, that "[t]he Bundestag, as the
legislature, is also prohibited from establishing permanent mechanisms...
which result in an assumption of liability for other states' voluntary
decisions, especially if they have consequences whose impact is difficult to
calculate."
On their face, these rulings seem to
restrict severely the ability of German Chancellor Merkel to offer sweeping
assurances of rescue to fellow eurozone
member-states. Specifically, the rulings appear to put an end to speculation
of potential pan-European bond issues. This is generally positive for the currency,
but potentially disastrous for the Union.
However, what many observers may
overlook is that the court indicated that greater German control over the
fiscal policies of other states could circumvent constitutional restrictions.
As Germany begins to argue that the only way it can finance the eurozone is if it controls the bloc, it may achieve a
century-old goal: imperium over the whole of Europe.
Viewed this way, the German court
appears to have issued a most clever ruling. It prevented the immediate collapse
of the euro by ruling the past German bailout of Greece acceptable. Then, it
appeared to put handcuffs on Chancellor Merkel for any future bailouts,
while, in the same stroke, bypassing the peoples' representatives in the full
German Parliament by placing authority for the crucial pre-approval in the
hands of the Budget Committee, a body far more easily influenced by Merkel.
At the same time, the court left Merkel
with only two paths forward: withdraw Germany from EU fiscal affairs, or
exert enough control the Germany becomes the de facto sovereign of Europe.
Since the German elite is quite invested in the
common currency at this juncture, it seems the court has fixed the country on
the track of establishing an economic über-empire.
Unfortunately, as is the tendency with
empires, the Germans will be taking on responsibility for her wayward
provinces in addition to her own debt problems. While this will stabilize the
euro in the short-run, I am not confident that Germany has the financial
muscle to hold up the PIIGS forever.
Instead, the ECB will come under even
more pressure to devalue the euro, robbing the savings of Germans, Finns, and
Dutch to pay for the excesses of Greeks, Italians, and Portuguese. The end
result of this process is the same for euro as it is for the dollar: high
inflation leading toward currency collapse.
The risk is that Germany ends up being buried in a palace of its own
construction.
John Browne
Senior Market Strategist
Euro Pacific Capital, Inc.
20271 Acacia Street, #200 Newport Beach, CA 92660
Toll-free: 888-377-3722 / Direct: 203-972-9300 Fax:
949-863-7100
www.europac.net
For in-depth analysis of this and other investment topics, subscribe
to Peter Schiff's
Global Investor Newsletter. Click here for your free
subscription.
Click here to download Peter's latest Special Report: My Five Favorite Gold & Silver
Mining Stocks.
Be sure to pick up a copy of Peter Schiff's just-released economic fable, How an Economy Grows and Why It
Crashes. Click here to learn more
and order.
|
