Since November 2011, I’ve been saying that Germany will leave the Euro, but NOT necessarily the EU. The reason? Well, for one thing Germany laid out legislation that would allow this happen. Then of course you have the following comments from Germany’s finance minister Wolfgang Schauble:
Wolfgang Schauble admits euro bail-out fund won’t halt crisis
Europe’s “big bazooka” bail-out fund is not ready and won’t stem the debt crisis that on Tuesday pounded Italy and the European Central Bank (ECB), admitted Wolfgang Schauble, Germany’s finance minister.
This was a pretty strong admission from the finance minister of the country that Europe looks to as a financial backstop. It was made back in November 2011. And the following is even more disconcerting for the future of the Euro.
Seeing in Crisis the Last Best Chance to Unite Europe
MR. SCHÄUBLE said the German government would propose treaty changes at the summit of European leaders in Brussels on Dec. 9 that would move Europe closer to the centralized fiscal government that the currency zone has lacked. The ultimate goal, Mr. Schäuble says, is a political union with a European president directly elected by the people.
“What we’re now doing with the fiscal union, what I’m describing here, is a short-term step for the currency,” Mr. Schäuble said. “In a larger context, naturally we need a political union.”
Critics say the spending cuts German leaders have demanded from other countries are hurting growth across the Continent, in the process making debts only harder to repay. And his proposals to give the European Commission far-reaching powers to enforce budgetary discipline have been likened by skeptics in Britain to an invasive new “super state.” Even some euro supporters fear that Mrs. Merkel and Mr. Schäuble are talking about long-term changes while panicked investors and practiced speculators are tearing the euro to pieces right now.
“There is a limited transition period where we have to manage the nervousness on the markets,” Mr. Schäuble said. “If it is clear that by the end of 2012 or the middle of 2013 that we have all the ingredients for new, strengthened and deepened political structures together, I think that will work.”
He sees the turmoil as not an obstacle but a necessity. “We can only achieve a political union if we have a crisis,” Mr. Schäuble said.
Note that Schauble repeatedly emphasized the goal of a “political union,” NOT a “fiscal union” or “monetary union.” Indeed, his one reference to a “fiscal union” is in the “short-term,” while stressing that in a “larger context” the EU needs a “political union.”
The message here was very, very clear: Germany was interested in the EU as a political entity, NOT the Euro as a currency. It was willing to act as backstop for the EU up to a point, but we’ve now reached that point.
How do I know?
Germany is now only €328 billion away from reaching an official Debt to GDP of 90%: the level at which national solvency is called into question.
Moreover, that €328 billion has already been spent via various EU props. Indeed, when we account for all the backdoor schemes Germany has engaged in to prop up the EU, Germany’s REAL Debt to GDP is closer to 300%.
In Euro terms, Germany now has €1 trillion in exposure to the EU via its various bailout mechanisms. That’s EQUAL TO roughly 30% of German GDP. If even a significant portion of that €1 trillion goes bad (which it will as this money has been spent helping the PIIGS), Germany’s financial system will take a MASSIVE hit.
This will guarantee Germany losing its AAA status, which in turn makes its funding costs much higher (see what happened to France in the last year: that country is now facing bank runs and its own solvency Crisis which you’ll be hearing about in the coming weeks).
Which brings us to today, where Germans area ALREADY USING DEUTSCHEMARKS AGAIN.
Who Needs the Euro When You Can Pay With Deutsche Marks?
Shopping for pain reliever here on a recent sunny morning, Ulrike Berger giddily counted her coins and approached the pharmacy counter. She had just enough to make the purchase: 31.09 deutsche marks.
“They just feel nice to hold again,” the 55-year-old preschool teacher marveled, cupping the grubby coins fished from the crevices of her castaway living room sofa. “And they’re still worth something.”
Behind the counter of Rolf-Dieter Schaetzle’s pharmacy in this southern German village lay a tray full of deutsche mark notes and coins—a month’s worth of sales.
Germans have yet to give up on the euro. But as Europe’s debt crisis rages on, many are indulging their nostalgia for the abandoned mark by shopping with it again—and retailers are happily going along.
As defunct currencies go, “die gute alte D-mark,” or “the good old D-mark,” as it is still affectionately called, is far from dead. Germans officially traded in the currency for euro bills and coins on Jan. 1, 2002, and the mark immediately ceased to be legal tender. But 13.2 billion marks—worth €6.75 billion ($8.3 billion)—remain tucked in mattresses, old prayer books, coat pockets or otherwise in circulation, according to the Bundesbank, more lucre than the euro bloc’s 16 other ex-currencies combined.
If the above article doesn’t spell it out for you, nothing will. Germans NEVER really trusted the Euro. They went along with it because of the benefit to their export driven economy. But now that the PIIGS and others are begging Germany to backstop the entire EU, they’re back to using deutsche marks again.
It’s now just a matter of time before Germany officially drops the Euro. Germans have no sentimental attachment to the currency. Angela Merkel is gaining major political points for butting heads with the EU (she’s up for re-election in 2013), and Germany is tapped out as a backstop. Again. Germany. Will. Leave. The. Euro.
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Chief Market Strategist
Phoenix Capital Research