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Germany Will Choose to Bail on the EU Rather Than Bail It Out

Phoenix Capital Research's picture




 

 

It all boils down to Germany.

 

I’ve been forecasting for months that the country will increasingly focus on domestic interests and that it will ultimately opt to leave the Euro rather than prop up the EU.

 

The former (focusing on domestic issues) is already underway.

 

Germany Plans Joint Federal-State Debt in Merkel Fiscal Deal

 

Chancellor Angela Merkel agreed to share borrowing costs with Germany’s states to help ease their budget squeeze, completing a deal the opposition said will help secure German ratification of the European Union’s fiscal pact.

 

Germany’s federal and state governments plan their first joint debt sale in 2013 to help the states meet the pact’s deficit limits, the German government’s press office said in an e-mailed statement in Berlin today.

 

Pressed by the Social Democrat-led opposition that could block the stricter European fiscal rules in parliament, Merkel agreed to a policy she opposes in confronting the debt crisis in the rest of the 17-nation euro area. She signaled her rejection of joint euro-area debt as recently as June 23, saying “liabilities and controls” must “go together.”

 

“We reached a solution that makes it clear there will be approval” of the fiscal pact in the upper house of parliament, Kurt Beck, the premier of Rhineland-Palatinate state and member of the opposition SPD, said in an ARD television interview.

 

http://www.bloomberg.com/news/2012-06-24/germany-plans-joint-federal-state-debt-in-merkel-fiscal-deal.html

 

As for the latter development (Germany leaving the Euro), I believe that this will occur once the EU Crisis spreads to France.  At that point any discussion of EU bailouts is pointless, as the very countries needing aid (France, Italy, Spain, and Greece) account for 53% of the ESM’s funding.

 

So far the markets have been willing to ignore the fact that Spain and Italy are meant to contribute 30% of the ESM’s funding. However, if France starts needing aid (and it will) it’s GAME OVER as any discussion of where the money will come from is moot.

 

By the look of things, this development is not too far away. France’s Socialist party took its lower house during the most recent elections. Already they are proposing reforms that will result in French businesses and capital leaving the country.

 

 

 

France’s new Socialist government is embarking on a series of risky experiments in business

 

Michel Sapin, the labour minister, has promised to make it so expensive for companies to lay off workers that it will no longer be worth their while. Firms that fire people while still paying dividends may be penalised. Another planned ruse is to force companies to sell factories, presumably along with the brands manufactured there, to competitors rather than close them down

 

Paris is full of rumours of hasty departures. PPR, a luxury-goods group which owns Gucci and Yves Saint Laurent, is reported to have plans to move its entire executive committee to offices in London as soon as this summer. Technip, a global oil-services firm, is rumoured to be about to move its official headquarters across the Channel. (PPR declined to comment, and Technip said it has no plans to move for now.) To the fury of a French member of parliament, David Cameron, Britain’s prime minister, this week promised to “roll out the red carpet” for French companies on the run from the new tax.

 

But the most important consequence of stratospheric taxes will be less visible, at least at first. Marc Simoncini is one of France’s best-known entrepreneurs—and one of the few business leaders to denounce the new measures publicly. Why, he recently asked, would anyone want to start a business, invest and succeed in the most taxed country in the world?

 

Tax is not the only threat to executive pay. Last week Pierre Moscovici, the finance minister, announced that pay for bosses of companies in which the French state holds the majority of shares will be capped at a flat rate of €450,000, or roughly 20 times the wage of the lowest-paid worker. The French experiment will no doubt be watched with interest around the rich world. In some cases it will lead to a 70% pay cut. Over time, the quality of management at these state firms, which had become more professional over the past decade, will surely suffer. Executives such as Guillaume Pepy, the boss of SNCF, the national railways, for instance, could secure a top position anywhere in his industry. Measures to limit pay at fully private firms are expected before long.

 

http://www.economist.com/node/21557318?fsrc=rss|bus

 

As one would expect, the wealthy French are fleeing the country.

 

Wealthy French Take Their Assets to London

 

It began in 2010, when wealthy Greeks started coming to London and buying up expensive townhouses in upmarket neighborhoods. Amid fears that Greece might leave the euro zone, they believed their money would be safe in Britain in its splendid isolation from the euro and the Continent's sovereign debt crisis.

 

Then rich Spaniards started arriving. They were following by well off Italians, who at the start of the year overtook Russians as the biggest group of foreign buyers snapping up property in London, according to a survey.

 

Whenever the euro crisis heats up somewhere in Europe, the demand for expensive homes increases in Western Europe's largest city particularly among well-heeled foreigners beset by asset angst.

 

London real estate agents are like the canary in the coalmine for the debt crisis. They can sense early on the next country to get sucked into the vortex. So who's up next? Apparently it's the French.

 

Real estate agents have been aware of a new wave of interest for months, but it's been especially noticeable since Feb. 28. The night before, the then Socialist candidate for French president, François Hollande, who famously said "I don't like the rich," announced that, if elected, he would raise the top rate of tax on incomes over €1 million to 75 percent. At home, he got much applause for the announcement. But in London, the news produced a reaction that was noticeable on the computers of the London-based property company Knight Frank.

 

"Since February, when Hollande announced his wealth tax, there has been a large rise in web searches from French customers," Liam Bailey, head of residential research at Knight Frank, recently told the Daily Telegraph…

 

To meet the demand, the property company Douglas & Gordon has just opened an office in South Kensington, where four native French speakers will be available to help out their house-hunting compatriots. Hollande's tax speech immediately led to a 40 percent increase in inquires from worried French citizens, says David Blanc from the London asset management firm Vestra Wealth.

 

http://www.spiegel.de/international/europe/wealthy-french-flee-to-london-amid-fear-of-hollande-a-833814.html

 

 

French banks are already leveraged at 25-to-1. The impact of a capital exodus by the wealthy will rapidly push leverage levels even higher. And given that French banks’ exposure to the PIIGS is equal to 30% of French GDP, it’s no surprise that French banks are posting some truly horrible charts.
 

I expect the EU Crisis to spread to France before autumn. At that point, it’s game over for any notion of the current EU lasting. Germany will walk.

 

Smart investors are using this latest rally based on the BS from the EU summit to prepare for what’s coming: an EU banking Crisis that will make 2008 look like a joke. On that note, I recently published a report showing investors how to prepare for this. It’s called How to Play the Collapse of the European Banking System and it explains exactly how the coming Crisis will unfold as well as which investments (both direct and backdoor) you can make to profit from it.

 

This report is 100% FREE. You can pick up a copy today at: http://www.gainspainscapital.com

 

Good Investing!

 

Graham Summers

 

PS. We also feature numerous other reports ALL devoted to helping you protect yourself, your portfolio, and your loved ones from the Second Round of the Great Crisis. Whether it’s a US Debt Default, runaway inflation, or even food shortages and bank holidays, our reports cover how to get through these situations safely and profitably.

 

And ALL of this is available for FREE under the OUR FREE REPORTS tab at: http://www.gainspainscapital.com

 

 

 

 

 

 

 

 

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Thu, 07/05/2012 - 07:07 | 2588176 XtraBullish
XtraBullish's picture

"The Frogs committed national suicide by entering a time machine backwards and ignoring the disaster of every single Socialist State that has ever existed."

 

As opposed to the "Capitalist States of Amerika/U.K." that blew up the world financial system a mere five years ago - how could that be worse than a "Socialist State"? Was Madoff a Socialist? How about Blankfein/Dimon? Socialists? Or Dick (I screwed Lehman) Fulds? Let's just take all of these politicians and make them serve jail-time for breaching the public trust by failing to throw those pricks in jail.

Thu, 07/05/2012 - 21:29 | 2590698 Lucius Corneliu...
Lucius Cornelius Sulla's picture

Blankfien, Dimon and Madoff are Corporatists (Fascists) not Socialists. 

Sun, 07/22/2012 - 11:54 | 2640297 Observer
Observer's picture

...or capitalists

Wed, 07/04/2012 - 15:02 | 2587275 rwe2late
rwe2late's picture

 To compel "austerity", bailouts for governments will be limited or non-existent.

The globalist elite who set policy in Germany and other nations will continue "bailouts" (wealth transfer) directed to the TBTF financial/military complex.

Wed, 07/04/2012 - 14:59 | 2587274 QuietCorday
QuietCorday's picture

The French will leave France, come to the UK and it will be yet another nail in the coffin for ordinary Brits.

Many people in the South East already cannot afford homes. The uber-rich flocking to London in the noughties had a ripple effect across the entire market, pushing prices higher as the traditional Chelsea lot were pushed to Notting Hill, the Notting Hills to Clapham, Claphamites to Balham etc .. all the way through. It now costs nigh on £250K to buy a two bed flat over a shop in Peckham, a traditionally inner-city area with high crime (guns and street shootings).

So then those totally priced-out move out of London to the regions ... bringing equity from London property or inflated ideas of prices with them. You end up with small family homes in the North going for ten to fifteen times the average income in Britain, never mind the average income in the North.

I have to say this, but the ordinary Brit is being priced out of their own country. Cost of living increasing from the top and wages depressed from the bottom through the migration of workers from the EU and elsewhere, who will accept low wages. 

 

 

Wed, 07/04/2012 - 14:44 | 2587245 ebworthen
ebworthen's picture

Deutschmarks!  Deutschmarks!  Deutschmarks!

Wed, 07/04/2012 - 14:26 | 2587210 Nachdenken
Nachdenken's picture

@Ghordius

I had posted a suggestion for a two tier Euro as well. 

Ghordius your proposal is similar. 

Rethinking, there will always be a leakage from one currency to the other, for Euro denominated sovereign debt will be carried on bank balance sheets and the balance sheets of bad banks in all the affectedi nations have toxic debt in USD, GBP as well as Euro which will need to be netted out in some way. We then have a two tier capital concept, each with differently weighted risk profiles.

The least complicated is the least likely solution - default so the Euro is wiped out , and then the Neuro introduced, with financial and fiscal coordination so the Euro fixed rate inconsistencies are corrected. The EU continues the Eurozone with a Neurozone whose credit lines will be renogiated in neuro and its SDR peg (!).  Dropouts make it cleaner.

The wage differentials and productivity in the present Eurozone are so wide that the fundamental anomaly in a single currency for such a wide range of economies is unworkable.

The entry point for certain countries into the Euro were false national income accounts, which remains an uncorrected basis for further calculation.

The European Ideal does not need a single currency, the ECU (remember ?) had a free float margin that was clumsy but allowed some room for devaluation against other European currencies.

There was no secondary market for ECU bonds, which allowed no real auction.  These were the negatives among others.

Wed, 07/04/2012 - 14:38 | 2587238 LowProfile
LowProfile's picture

Ghordius didn't propose that, he wrote that it was a consideration during the design phase of the EUR.

So it seems likely it will happen, given it was designed to do that from the beginning.

If that doesn't happen, I suspect Germany will introduce the DM parallel to the EUR.

Wed, 07/04/2012 - 12:52 | 2587010 janchup
janchup's picture

The Frogs committed national suicide by entering a time machine backwards and ignoring the disaster of every single Socialist State that has ever existed.

 

Wed, 07/04/2012 - 13:45 | 2587131 kikkoman
kikkoman's picture

Suicide indeed. Only this time it won't take as long, one hopes, because there isn't much of other people's money left to begin with.

And not much pomp and glory either, except for Mr. Hollande who, I suppose, is greatly enjoying his newfound perks.

I would have never believed our Western neighbors are such a bunch of boobs.

Wed, 07/04/2012 - 14:26 | 2587211 kikkoman
kikkoman's picture

okay, 41.49% of you guys are boobs.

Wed, 07/04/2012 - 12:48 | 2586999 Popo
Popo's picture

Graham.  You're a lightweight.   Totally out of your league here on Zerohedge.   Perhaps the message boards on Yahoo Finance would be more appreciative.

Wed, 07/04/2012 - 12:58 | 2587024 kito
kito's picture

leave graham alone, he saved tylers life years ago............

Wed, 07/04/2012 - 12:33 | 2586942 max2205
max2205's picture

'months'. !!!!!!!!!!!

Got it......

Wed, 07/04/2012 - 12:20 | 2586917 Lucius Corneliu...
Lucius Cornelius Sulla's picture

What was said about France is true.  I spend quite a bit of time in Europe on business.  Global corporations actively avoid hiring in France.  Most administrative functions are handled in neighboring countries or off-shored to India.  It is literally impossible to fire an employee no matter how egregious their behaviour.  French workers know thier "rights" and many take full advantage of their employer's predicament.

Wed, 07/04/2012 - 13:38 | 2587117 Landrew
Landrew's picture

You must be right. Your single experience must be how all of France functions. I have worked and lived in France also and saw nothing like your 1% warped view of kind hard working very bright people. Of course your company would move all the work to India and China because you care nothing of people only profits. Money is like water, we will all be working for a few dollars an hour as the Indians and Chinese want more and we have to wage down to work at all. I hope your happy with the depression, it's here and now.

Wed, 07/04/2012 - 16:28 | 2587467 Lucius Corneliu...
Lucius Cornelius Sulla's picture

I'm just making an observation about the business climate and how labor regulations are choking off investment and jobs.  What is the French government doing to help private businesses compete globally?  How is electing a Socialist going to help?

Wed, 07/04/2012 - 23:14 | 2587884 dogbreath
dogbreath's picture

I made a fiend a a trade show that had a geotechnical firm in france.  he spoke poorly of all the employees except one farm boy who knew how to work

Wed, 07/04/2012 - 11:33 | 2586791 Azannoth
Azannoth's picture

I think you think in too straight lines, they will weasel their way out through inflation, taxes, capital controls, rewriting of the laws etc. we're in for another 10 years of this malaise and no telling what after that, and when the Titanic ís finally ready to go under they will do to us what they did on the real Titanic lock us in our 'lower levels' making sure they and their friends have no competition to the lifeboats, all I say is jump ship now

Wed, 07/04/2012 - 11:27 | 2586774 kito
kito's picture

germany isnt leaving the euro!!! enough of this ridiculous talk. GERMANY WILL NEVER LEAVE THE EURO!!! PASTE THIS ON YOUR FOREHEAD.................

Wed, 07/04/2012 - 12:57 | 2587022 sharkieboy
sharkieboy's picture

It is coming, unless they want to  commit financial  suicide.

Wed, 07/04/2012 - 12:22 | 2586924 Lucius Corneliu...
Lucius Cornelius Sulla's picture

I think it will be the other way around.  The terms of staying in the Euro will be to harsh for Greece, Italy, Spain, etc... to stomach.  They will leave and the Euro will survive with Germany,Austria, France, Belgium, Holland, Denmark.  Basically just the Northern core.

Wed, 07/04/2012 - 12:56 | 2587015 kito
kito's picture

yes, if there is a breakup, the core stays......the piigs fly................no question about that. NONE. ZERO.........

Wed, 07/04/2012 - 14:34 | 2587228 LowProfile
LowProfile's picture

See my question at the top of the comments.

Nothing I can see would prevent Germany from reintroducing the DM and keeping the EUR.

Thu, 07/05/2012 - 00:34 | 2587969 Lucius Corneliu...
Lucius Cornelius Sulla's picture

I'd love to see the US government reintroduce the silver and gold coins as legal tender, along side the dollar of course.  Which would you choose to hold?

Wed, 07/04/2012 - 11:12 | 2586735 LowProfile
LowProfile's picture

Someone explain to me:  Is there anything that would prevent Germany from reintroducing the DM, but still using the EUR as a parallel currency?

Seems like the path of least resistance.

Wed, 07/04/2012 - 11:41 | 2586811 Ghordius
Ghordius's picture

+1 you are describing a scenario that was discussed in the design phase, including an interesting sub-scenario of all nations belonging to the eurozone leaving the EUR1 and immediately creating the EUR2. old debt is denominated in EUR1, fresh in EUR2.

EUR1 could then be used with or even "married to" the SDR to create a truly international fiat - there are parallels going back to the 15th century about the "usefulness" of "mountains of debt" for political purposes.

nevertheless, the issue is moot as long as we are still all happily devaluing, this is the leg down, all accellerating, and we have not reached the breaking phase where some policies will be reversed. then the fun begins

I have said various times here: the EUR is the newest, until now most sophisticated financial weapon - I mean currency. and there is a reason why it has no faces or real buildings on it's notes (and so devoid of national pride): it's politically expendable. if really necessary... we are not there, yet

Wed, 07/04/2012 - 13:29 | 2587102 DoChenRollingBearing
DoChenRollingBearing's picture

 

Ghordius wrote:

"... there is a reason why it has no faces or real buildings on it's notes (and so devoid of national pride): it's politically expendable. if really necessary... we are not there, yet"

***

Thank you for this insight into the euro.  Indeed, they gave the euro experiment a lot of thought.  It looks like they also gave thought as to its demise.

Wed, 07/04/2012 - 14:42 | 2586931 LowProfile
LowProfile's picture

Thanks Ghordius.

I suspect that the EUR will survive this (although a few EU banks and perhaps a few periphery EU governments, will not; *edit* and likely they will introduce EUR2 as you have described).  This is due to it's construction, specifically that the issuing bank holds a significant portion of its reserves in gold, which is marked to market (unlike US treasury gold, which is accounted for at a ludicrous $42.22 per ounce); and that no single country issues the currency.

This makes the EUR a superior transactional currency, as it is a better temporary store of value than any other currency, has a big enough float to handle international trade, and recognition to be accepted across many borders.

I think ultimately the EUR will prove too useful to abandon; even though current debts in EUR will have to be renegotiated, or the EUR will have to be inflated, or both.

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