For several months now, I’ve been stating that the world’s central banks are in a bind. That bind is that their monetary policies are becoming less and less effective at placating the markets while the consequences of said policies (higher costs of living, the targeting of troubled banks in the credit market, etc.) are increasing.
As a result of this, central banks have begun resorting to more and more “verbal intervention” or promises to “act” without ever acting.
We received confirmation of this over the weekend when Angela Merkel chastised Germany Bundesbank Head Jens Weidmann for stating that an ECB policy of buying bond was like a dangerous drug.
Angela Merkel tried to calm a growing storm over euro zone crisis strategy on Sunday after the Bundesbank likened ECB bond-buying plans to a dangerous drug and a conservative ally of the German leader said Greece should leave the currency bloc by next year.
The comments, from central bank chief Jens Weidmann and a senior figure in the Bavarian Christian Social Union (CSU), Alexander Dobrindt, point to mounting unease in Germany with the policies being used to combat the three-year old debt crisis.
Domestic criticism has narrowed Merkel’s room for maneuver at a time when Greece is in dire need of more aid and policymakers are scrambling to prevent contagion from enveloping big countries like Spain and Italy.
Two days after Greek Prime Minister Antonis Samaras visited Berlin and made an impassioned plea for politicians there not to talk up the possibility of a Greek euro exit, Merkel herself sent a warning to allies who have said the euro zone would be better off without its weakest link.
“We are in a very decisive phase in combating the euro debt crisis,” Merkel told public broadcaster ARD in an interview. “My plea is that everyone weigh their words very carefully.”
For over two years now, we’ve been hearing time and again that the European crisis was “solved” and that things would improve. It’s obvious now that all of those claims were lies. Indeed, we’re now at the point that politicians are openly asking central bankers not to discredit attempts to prop up the markets.
Let me ask you, how desperate do things have to be that a politician asks a central banker not to use certain words during public appearances?
The answer: very, very desperate.
Indeed, the situation in Europe is fast approaching a crescendo. The German Constitutional Court votes on whether the ESM bailout fund is even legal on September 12. If it doesn’t, it’s the end of the EU as we know it.
Could this happen? The majority of Germans are fed up with Greece, worried about inflation, and want the Deutsche Mark back. Also bear in mind that Angela Merkel is up for re-election next year. So the courts could in fact rule the ESM is unconstitutional which would end the EU right then and there.
But, for the sake of argument, let’s say that Germany does ratify the ESM and the ESM is given a banking license (which Germany says will never ever happen). Even then Spain and Italy are supposed to fund 30% of it!
So even in a best case scenario, the bankrupt nations asking for bailouts are going to fund 30% of the very bailout fund that will bail them out!?!?
You couldn’t make this stuff up if you tried.
Make no mistake, the crisis in Europe is far from over. If anything, we’re fast approaching the REAL storm over there: when countries actually start defaulting and leaving the Euro.
When this happens, we will see the return of systemic risk. And the US will not prove immune to it. Europe is the single largest economy in the world. It’s also China’s single largest trade partner. If the EU goes down, it will send ripple effects around the globe. And with China entering a hard landing and the US re-entering a recession the potential for another 2008 type event is higher than at any point in the last three years.
On that note, I’ve already alerted my Private Wealth Advisory subscribers to a handful of investments that will explode higher as this situation picks up steam.
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