As I’ve stated time and again, Germany is the only EU member that has the money to get Greece through this next round of debt payments (14.4 billion Euros coming due March 20). But Merkel isn’t going to give the money without Greece submitting to German fiscal demands.

However, there is no way Greece will submit to German fiscal authority. Heck the Greeks are even going so far as to bring up German war reparations from WWII!

Greek MP’s raise the issue of German war reparations

The Athens News reported that the MP’s have stressed that Germany owes Greece a debt of 54 billion euros before interest (70 billion with interest). They are calling for the issue to be raised as a national issue as Greece was the only country to which Germany failed to pay war reparations.

The issue of war reparations is one which is widely discussed amongst the Greek population who are increasingly resentful of criticism from Germany, which came to the fore when Germany proposed that Greece hand over budgetary sovereignty to the EU. In an article in German paper Der Spiegel in June 2011, eminent historian Albrecht Ritschl, a professor at the London School of Economics, criticized Germany for their hostility towards Greece in the current economic. He pointed out that Germany’s debt default in the 1930s makes the Greek debt look insignificant in comparison.

http://digitaljournal.com/article/319064#ixzz1lqi1y9WF

Let’s be blunt here, Merkel is well aware that Greece will likely never submit to German fiscal demands. She is also well aware that:

1) Come April and May, all her efforts to unite the Euro under a banner of fiscal prudence (read: German rule) will end as it’s highly likely France will have become completely socialistic

 2) Greece will have already defaulted and German banks will be in trouble.

Regarding #1, Nicolas Sarkozy, who has technically yet to announce his campaign, will soon be facing off against an extremely popular socialist François Hollande, in France’s two round elections for President in April and May.

A few facts about Hollande:

1)   He wants to cut all tax breaks to the wealthy and use the money to create more government jobs

2)   He wants to lower the retirement age to 60

3)   He completely goes against the recent new EU fiscal requirements Merkel just convinced 17 EU members to agree to and has promised to try and renegotiate them to be more loose and profligate

Now, Hollande is extremely popular with French voters (according to current polls, if he and Sarkozy make it to the second round of elections in May, Hollande would win 60% of the votes while Sarkozy only got 40%).

So Merkel knows Sarkozy will likely soon be gone… which would mean she’d be alone in her quest for greater fiscal conservatism in Europe.

Merkel also knows that it is highly likely that Greece will default (no one else has the funds to bail the country out and Greece will never submit to German fiscal demands especially given the two country’s WWII history).

So Merkel is staging a brilliant political move right now.

By emphasizing that she doesn’t want to kick Greece out of the Euro but will give Greece more money only if Greece submits to German fiscal control, Merkel is in fact doing two things politically:

1)   She’s winning MAJOR political points in Germany where up until recently her ratings were dropping like a stone due to her being perceived as “pro-bailouts.”

Merkel Approval in Germany Climbs to Highest Level Since 2009 Re-Election

Support for German Chancellor Angela Merkel’s party bloc rose to the highest since before her re- election in 2009, pointing to voter backing for her handling of the European financial crisis.

Merkel’s ratings have jumped since December as she led the drive to lock in euro-area budget discipline while resisting calls to provide more public money to fight the debt crisis. It’s a reversal after Germans’ anger at bailouts for Greece (GDBR10), Ireland and Portugal sent support for her bloc to 29 percent in the fall of 2010 and helped defeat the Christian Democrats in state elections last year.

“Germans like that she continues to be seen as tough on Greece while managing to get all the other euro countries on board,” Christian Schulz, an economist at Berenberg Bank in London, said by phone. “Italy, Greece, Spain, Portugal — all these countries are moving into a German direction.”

http://www.bloomberg.com/news/2012-02-08/merkel-approval-in-germany-climbs-to-highest-level-since-2009-re-election.html

The second thing Merkel is doing by emphasizing that she doesn’t want to kick Greece out of the Euro but will give Greece more money only if Greece submits to German fiscal control, is:

2)   She’s covering herself in case Germany has to pull out of the Euro and others accuse her of not doing enough to stop the debt implosion (her defense will be “we offered the money time and again when no one else did, but they didn’t want to get their financial house in order”)

This last option is not some delusion. Germany has just gone to the IMF and G20 requesting additional funds for the Greek bailout and was told, “firewall Europe first, then we’ll talk.” The majority of Germans don’t want a second bailout. And Germany’s Finance Minister has made it clear that Germany won’t be putting up more money for the various EFSF or ESM bailout funds for Europe.

In other words, the big players at the table are finally showing their hands. Given the public outrage concerning the 2008 bailouts as well as the fact it’s an election year, the US-backed IMF won’t cough up money for a European bailout. Which means Germany is on its own here. And it’s very likely going to lose its biggest ally in the fight for austerity (Sarkozy).

Will Germany go “all in” on the Euro experiment? I doubt it. In fact I’ve found the “smoking gun” the little known act that Germany has recently implemented that proves the country has a Plan B that involves leaving the Euro with minimal damage.

To find out what it is, and take actionable advice on how to play the markets I suggest checking out my Private Wealth Advisory newsletter.

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Graham Summers

Chief Market Strategist