For months I’ve been warning that when push come to shove Germany will bail on the Euro.
The reasons for this are simple:
1) The German public and court system won’t stand for QE from the European Central Bank
2) Issuing Euro bonds goes against the German constitution
3) Germany has its own share of domestic problems with a REAL Debt to GDP ratio north of 200% and its banks needing tens of billions of Euros in new capital
All of these factors lead me to believe that Germany would refuse to be the ultimate backstop for the EU. You could also see Germany preparing the legislation to allow it to walk if it wanted to:
German Chancellor Angela Merkel’s Christian Democratic Union party voted to allow euro states to quit the currency area, endorsing the prospect of a move not permitted under euro rules.
The resolution reads:
“Should a member [of the euro zone] be unable or unwilling to permanently obey the rules connected to the common currency he will be able to voluntarily–according to the rules of the Lisbon Treaty for leaving the European Union–leave the euro zone without leaving the European Union. He would receive the same status as those member states that do not have the euro.”
I believe Germany implemented this legislation for itself… not some other country. And by the look of things, Germany’s getting a lot closer to walking.
BBK Thiele: Current ECB Government Bond Buys Violate Treaty
The European Central Bank’s government bond buys are a violation of the Maastricht Treaty, Bundesbank board member Carl-Ludwig Thiele said Monday.
Thiele’s comments depart form the official Bundesbank line. While the German central bank has warned that larger purchases may be illegal, it has said that current purchases do not violate the prohibition of monetary financing.
Thiele recalled that the decision to buy Greek government bonds had found no support from German ECB Governing Council members. “Germany was over-ruled on the Council,” Thiele said.
“These buys were a violation against the prohibition of monetary financing, that is the basic principle that a central bank should not give credit to a state,” Thiele said in a speech text provided by the Bundesbank.
Bundesbanker says euro zone must forget idea of QE
Europe must abandon the idea that printing money, or quantitative easing, can be used to address the euro zone debt crisis, Bundesbank board member Carl-Ludwig Thiele said on Monday.
Thiele called for euro zone countries to exercise fiscal discipline and said that boosting the resources of Europe’s rescue funds would buy time to address the bloc’s debt woes.
“But lasting confidence cannot be bought with money alone,” he added in the text of a speech for delivery in Hamburg.
“One idea should be brushed aside once and for all – namely the idea of printing the required money. Because that would threaten the most important foundation for a stable currency: the independence of a price stability orientated central bank.”
These are extremely strong statements coming from the Bundesbank. Remember, Merkel is the German political leader, but she doesn’t control the purse strings to Germany: the German courts and Bundesbank do. And if they don’t support more bailouts, there’s nothing Merkel can do.
We see similar warnings coming out of German CEOs:
Linde CEO says Germany should mull euro exit-paper
Germany should consider leaving the euro if efforts to impose fiscal discipline upon indebted euro zone countries fail, the head of industrial gases firm Linde (LING.DE) told German weekly paper Der Spiegel.
“I fear the willingness of crisis countries to reform themselves is abating if, in the end, the European Central Bank steps in,” Linde’s chief executive Wolfgang Reitzle was quoted as saying.
“If we do not succeed in disciplining crisis countries, Germany needs to exit,” said Reitzle who was previously a board member at carmaker BMW (BMWG.DE) and head of Jaguar and Land Rover.
I firmly believe Germany is already makings moves to prepare for precisely this outcome. No EU member state is going to submit to German authority regarding fiscal policies. Indeed, virtually every EU legislation passed in the post-WWII era was aimed at limiting Germany’s power.
And Germany isn’t going to simply prop up the EU out of the goodness of its heart. As I mentioned before, Germany has its own domestic issues to deal with. And when push comes to shove, Germany will look after its own interests rather than Greece’s or Italy’s.
With that in mind I believe it’s only a matter of time before Germany walks out of the EU. When this happens the Euro will collapse a minimum of 20-30% and we will see numerous sovereign defaults.
When the smoke clears the EU in its current form will be broken and we will have passed through a Crisis far worse than 2008.
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Chief Market Strategist
Phoenix Capital Research