by Michael Snyder
August 2, 2012
The financial chess game in Europe is still being played out, but in the end
it is going to boil down to one very fundamental decision.
Is Germany going to allow the ECB to print up
trillions of Euros and use those Euros to buy up the sovereign debt of
troubled Eurozone members such as Spain and Italy or not?
Nothing short of this is going to solve the
problems in Europe. You can forget the ESM and the EFSF.
Anyone that thinks
they are going to solve the problems in Europe is someone that would also
take a water pistol to fight a raging wildfire. No, the only thing that is
going to keep Spain and Italy from collapsing under the weight of a mountain
of debt is a financial nuke.
The ECB needs to have the power to print up
trillions of Euros and use that money to buy up massive amounts of sovereign
debt in order to guarantee that Spain and Italy will be able to borrow lots
more money at very low interest rates. In fact, this is probably what
European Central Bank President Mario Draghi has in mind when he says that
he is going to "do whatever it takes to preserve the euro".
is one giant problem.
The ECB is not going to be able to do this
unless Germany allows them to. And after enduring the horror of
hyperinflation under the Weimar Republic, Germany is not too keen on
introducing trillions upon trillions of new Euros into the European economy.
If Germany allows the ECB to go down this path,
Germany will end up experiencing tremendous inflation and the only benefit
for Germany will be that the Eurozone was kept together. That doesn't sound
like a very good deal for Germany.
Right now, the yield on 10 year Spanish bonds is
above 7 percent and the
yield on 10 year Italian bonds is
above 6 percent.
Those are unsustainable levels.
The only thing that is going to bring those bond yields down permanently to
where they need to be is unlimited ECB intervention. But that is not going
to happen without German permission.
situation in Spain gets worse by the day.
An article in
Der Spiegel recently described the slow motion bank run that
is systematically ripping the Spanish banking system to shreds...
Capital outflows from Spain more than
quadrupled in May to €41.3 billion ($50.7 billion) compared with May
2011, according to figures released on Tuesday by the Spanish central
In the first five months of 2012, a total of €163 billion left the
country, the figures indicate. During the same period a year earlier,
Spain recorded a net inflow of €14.6 billion.
If those numbers sound really bad to you, that
is because they are really bad.
At this point, authorities in Spain are starting to panic.
According to Graham Summers, Spain has imposed the following new capital restrictions
during the last month alone...
A minimum fine of €10,000 for taxpayers
who do not report their foreign accounts
Secondary fines of €5,000 for each
No cash transactions greater than €2,500
Cash transaction restrictions apply to
individuals and businesses
How would you feel if the U.S. government
permanently banned all cash transactions greater than $2,500?
That is how crazy things have already become in Spain. We should see the
government of Spain formally ask for a bailout pretty soon here. Italy
should follow fairly quickly thereafter.
But right now there is not enough money to completely bail either one of
them out. In the end, either the ECB is going to do it or it is not going to
A moment of truth is rapidly approaching for Europe, and nobody is quite
sure what is going to happen next.
According to the Wall Street Journal, the
central banks of the world are on "red alert" at this point...
Ben Bernanke and Mario Draghi, with words
but not yet actions, demonstrated this week that they are on red alert
about the global economy.
Expectations are now high that Mr. Bernanke's Federal Reserve and Mr.
Draghi's European Central Bank will act soon to address those worries.
But both face immense tactical and political challenges and neither has
a handbook to follow.
So what happens if Germany does not allow the
ECB to print up trillions of new Euros?
Financial journalist Ambrose Evans-Pritchard
recently described what is at
stake in all of this...
Failure to halt a full-blown debt debacle in
Spain and Italy at this delicate juncture - with China, India and Brazil
by now in the grip of a broken credit cycle and the US on the cusp of
fresh recession even before the “fiscal cliff” hits - would tip the
entire global system into a downward spin, triggering the sort of
feedback loop that caused such havoc in late 2008.
As it has been written about so frequently,
is running out for the global financial system.
Even Germany is starting to feel the pain. This week we learned that
unemployment in Germany has risen
for four months in a row.
So what comes next?
There is actually a key date that is coming up in September.
The Federal Constitutional Court in Germany will
rule on the legality of German participation in the European Stability
on September 12th.
If it is ruled that Germany cannot participate in the European Stability
Mechanism then that is going to create all sorts of chaos. At that point all
future European bailouts would be called into question and many would start
counting down the days to the break up of the entire Eurozone.
If Germany did end up leaving the Eurozone, the transition would not be as
difficult as many may think.
For example, most Americans may not realize this but Deutsche Marks are
currently accepted at many retail stores throughout Germany.
from a recent Wall Street Journal article...
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
"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.
I have a feeling that it would be much easier
for Germany to leave the euro than it would be for most other Eurozone
The months ahead are certainly going to be very interesting, that is for
sure. Europe is heading for a date with destiny, and what transpires in
Europe is going to shake the rest of the globe.
Sadly, most Americans still aren't too concerned with what is going on in
Europe right now.
Well, if you still don't think that the problems
in Europe are going to affect the United States, just check this
from the Guardian...
General Motors' profits fell 41% in the
second quarter as troubles in Europe undercut strong sales in North
America's largest automaker made $1.5bn in the second quarter of 2012,
compared with $2.5bn for the same period last year. Revenue fell to
$37.6bn from $39.4bn in the second quarter of 2011. The results exceeded
analysts' estimates, but further underlined Europe's drag on the US
Profits at General Motors are down 41 percent
and Europe is being blamed.
The global economy is more tightly integrated than ever before, and there is
no way that the financial system of Europe collapses without it taking down
the United States as well.
And considering the fact that the U.S. economy
has already been steadily
collapsing, the last thing we need is for Europe to come along and take our
legs out from underneath us.
So what do all of you think about the problems in Europe?
Do you see any possible solution?