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With investors now emerging from a state
of panic after the harrowing losses of late July and August, stock markets are
now rising and gold is finally falling after a record run that pushed its
price north of $1,900 per ounce. The buoyant mood is largely undergirded by
the hope that on this Friday, August 26th, Fed Chairman Ben Bernanke will
announce another round of stimulus to stop the U.S. economy from slipping
back into another recession.
In contrast to this American expectation
for more monetary manna from the heavens, many Eurozone governments have
instituted harsh austerity programs. But behind the scenes the European
Central Bank (ECB), in direct contradiction to the EU formation treaty, continues to enact a rescue package that purchases
billions of dollars of subpar Eurozone sovereign debt. But at present, few
governments or large financial players care much for legality.
As just about everyone knows, the lion's
share of the bailout funds used by the ECB comes from Germany. However, the
assumption that Germany will continue to provide these rescue funds depends
not on German politicians and public opinion, as most investors think, but on
the crucial judicial review of Germany's Federal Constitutional Court.
Unlike the U.S. Supreme Court, the
German high court is not an appeals court. It conducts detailed proactive
judicial review of all German Government actions. In its field, it is
supremely powerful. The citizens of many countries, including those of the
US, UK and EU may wish they had such an effective curb on the abuse of
constitutional power by national governments. Indeed, it could be argued
that had such a court existed in the US, UK, and EU, most of our current
political, economic and financial woes would not exist.
In addition to its prodigious power, the
Federal Constitutional Court of Germany is physically sited in Karlsruhe,
well away from any 'persuasion' in the political center of Berlin or the
financial center of Frankfurt. The Court is truly independent and has ruled
quietly, often against government actions. Quite recently, it ruled that
the EU had a serious "democratic deficiency." As a result, it ruled
that many EU rulings would have no effect in Germany until they had been
debated fully by the German Parliament. Unlike the courts of many nations,
this one is no political pushover.
German bailouts have been central
to all proposed "solutions" to the European sovereign debt problem.
Defaults from even small Eurozone states would be a threat to many huge
international banks that either hold significant amounts of Euro sovereign
debt or have exposure to it by way of credit default swaps or interbank
relationships. Still more important, continued German bailouts are of
singular importance to the survival of the euro-the world's second currency,
which forms much of the exchange reserves of major central banks and
corporations worldwide.
In short, if the salvage of many
Eurozone nations is not led by German bailout money, the euro may
well collapse, threatening the world's major banks and many governments.
The Federal Constitutional Court of
Germany is due to issue a judicial ruling on September 15 regarding the
Constitutional legitimacy of the German Government's spending of citizens'
money to bailout foreign nations. The future of the euro, the international
banking system, and even of the entire socialist European Union experiment, can
hang on the Court's decision.
Given the importance of such a ruling,
it is surprising that the proceedings have been largely ignored by the
mainstream media. However, if more market participants were aware of how an
adverse ruling from the Court would throw a monkey wrench into the entire
bail-out apparatus, the mood would be quite different in stock markets on
both sides of the Atlantic. If German bailout spigots are tightened,
financial stocks should plummet and the euro could fall sharply. In contrast,
Swiss francs, Yen, Sterling and even for a short time the US dollar, may rise. But the biggest impact could be in
the precious metals market.
So keep your
eye on German legal news. It may make more impact on your portfolio than you
ever could have imagined.
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
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