Merkel's Now Backed Into a Corner... Will She Commit Political Suicide or Bail on the Euro?

Phoenix Capital Research's picture


As I’ve noted in previous articles, politics, not economics, rule Europe. What I mean by this is that most major decisions in Europe are determined by political agendas that ignore economic and financial realities.


This is at the core of the “welfare state” mentality that permeates Europe as a whole. The EU in general is comprised of an aging population that is more concerned about receiving the pensions/ health benefits/ social payouts that were promised to them by the system than anything else.


As a result of this, EU voters, who determine EU elections, don’t take action until what has promised to them comes under threat.


For this reason, EU political leaders will maintain their agendas regardless of whether said agendas go against financial or economic realities (or common sense for that matter) until these agendas begin to have real negative consequences for their political careers.


A perfect example of this paradigm in action is German Chancellor Angela Merkel who was relatively “pro-bailout” until German voters began to thrash her political party in Germany’s state elections (March 2011).


She then altered her strategy to one of offering to provide bailout funds to Greece and others but only if these EU members met fiscal demands that were so onerous that the likelihood of them accepting the deal was little to none.


As a result of this decision to start playing “hardball,” Merkel’s political approval ratings shot to their highest levels since her 2009 re-election. At the same time, she was able to maintain her agenda of extending Germany’s control over Europe from a fiscal perspective (another plus in the eyes of German voters) without abandoning Germany’s allegiance to the Euro which would only turn the rest of the EU against Germany.


And then… German voters found out that she’s secretly been bailing out Europe along with the Bundesbank:


German tempers boil over back-door euro rescues


Professor Hans-Werner Sinn, head of Germany's IFO Institute, said German taxpayers are facing a dangerous rise in credit risk from a plethora of bail-out schemes. "The euro-system is near explosion," he told Austria's Economics Academy on Thursday.


Dr Sinn said Germany is on the hook for much of the €2.1 trillion (£1.72 trillion) in rescue measures for EMU debtors - often by the back-door - that will saddle Germans with ruinous losses one day.


"It is a horror scenario," he said, warning that the euro system is splitting friendly countries into blocs of mutually hostile creditors and debtors, exactly the opposite of what was hoped.


Earlier this week, the Foundation for Family Business in Munich filed a criminal lawsuit against the Bundesbank, accusing the board of disguising the true scale of risk born by German citizens.


As a direct result of this, Merkel’s CDU party is getting slammed again in state elections. And remember, Merkel is up for re-election in 2013. In that context as well as the recent elections in France and Greece, the stage is set for the EU to collapse in the future. Indeed, Germany’s been almost expecting this for months now:


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 emphasizes 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 is very, very clear: Germany is interested in the EU as a political entity, NOT the Euro as a currency. With that in mind, as well as Merkel’s recent political struggle, the stage is set for a possible exit from the Euro on the part of Germany.


True this would have horrible consequences for the EU both politically AND financially. But the alternative (implode Germany and commit political suicide) is no better. And in the end, politics wins, which is why I think when push comes to shove, Germany will pull out of the Euro (but not the EU) rather than backstop the system for much longer.


On that note, I fully believe the EU in its current form is in its final chapters. Whether it’s through Spain imploding or Germany ultimately pulling out of the Euro, we’ve now reached the point of no return: the problems facing the EU (Spain and Italy) are too large to be bailed out. There simply aren’t any funds or entities large enough to handle these issues.


So if you’re not already taking steps to prepare for the coming collapse, you need to do so now. 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 investment (both direct and backdoor) you can make to profit from it.


This report is 100% FREE. You can pick up a copy today at:


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:




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supermaxedout's picture

Im really wondering why so many people believe the Euro is in trouble. Its just a currency. And its a stable one as its record of the past 10 years showed.  And this is the problem. Greece was never used to operate with a stable currency. Their mountains of debt were always cut down by their sky high inflation in the Drachma years. But unfortunately to that time nobody borrowed them a money except for exorbitant high interest. 

So going back to the Drachma does not help Greece at all. It would not make its economy one bit more productive. The export business was never a big thing in Greece since there is not that much besides olive oil and wine and other goodies. Plus they had a thriving shupping industry.  Plus of course tourism.

But tourism is down anyhow because many tourist do not prefer anymore Greece as one of their favorite destinations. This has many reasons. The fact that Greece is not anymore cheap for the Northerns is one reason besides many others.  Tourism in general went down because of the crisis. For example the Brits nowadays do seldom make holidays on the continent simply because the pound became so weak compared to the Euro.  One should expect now that the people from the continent do make more holidays in the UK but that is not the case.  Its nearly not visible till now that the Olympics do take place this year in London. Looks like the Brits do not have anymore money for good and professional marketing campaign for the Olympic. Im wondering why is this. The Brits can simply print some more from their pound QE.

Maybe the Greeks should introduce the Pound as their new currency. This is much easier than to introduce a new Drachma which would be devalued already before it would ever exist. No a New Drachma is mission impossible. Therefore the Pound would be a good solution and to give the Greeks a good head start, the Brits should deliver the first initial batch of money needed free of charge. Just print it and sent it via UPS to Athens.  The Greeks can then use these Pounds to make holidays in the UK and enjoy the Olympic games. Anyhow its a Greek thing.  And London would be full of visitors during the games. That would be a great way how to stimulate the Greek and the UK economy.


Dingleberry's picture

Because ain't just Greece. The writing is on the wall. Either Germany keeps it sun and sex-loving "partners"  in Greece, Spain, Italy, etc. (read: consumers) propped up, or its mercantilistic, export-driven market goes to where Hitler currently resides....take your pick.

supermaxedout's picture

I believe you have no idea about Italy and Spain.  They have poblems now, but so what.

Italy has two strong forces. a) the industrial power house in North Italy and b) the Catholic Church in Rome which is the biggest commericial enterprise in the world with an influence way beyond your imagination. As a matter of fact its even an independent state, minting its own Euro coins with motives from the Vatican.

Nowadays we have a situation, that these two forces do pull on the same side of the rope in Italy. So do not wory about Italy.

Spain is problematic but not a catastrophy. The Spaniards will need a little longer compared to Italy but no doubt they will find a way how to survive and prosper.

And since both countries are not governed by idiots they know that it is paying out for them to cooperate closely with Germany which is by far their biggest export markets.

MrNude's picture

Italy has a 50/50 chance of making it through in one piece.

If you think Spain is in any shape or form fine then i've got a bridge to sell you.

24% unemployment, rising interest rates, the banks left holding all that sour real estate they can't shift for love nor money.

Spain's middle name right now is Castastrophe. 

supermaxedout's picture

In the Franco dictatorship times the economy was much worse. This period found its final endpoint in 1985 when the fascist Francist party gave up power for the first time since their victory in the extreme bloody civil war over the socialists in 1936.  The Franco time was the period were Spain really had to fear for its future. The downturn to this catastrophy started with the US war on Spain which turned the Philippines and Cuba away from Spain into US colonies. Thus the old  Spain the former superpower was finished and unable to continue th old way.

If you visit today Spain everyone can see that things have changed dramaticlally to the better since Spain joined the EU in 1986.  In all flelds of the economy as well as civil rights Spain made unbelievable progress.

No doubt ther is now a crisis but its very small compared to the catastrophies before. This crisis will not rock Spain in its foundations. The Spainards know that things can not become better forever. For Spain its clealy a dramatic economic downturn but as long as there is hope for the better one day things will stay calm. Its only not anymore boom boom times , the party is over and the people have to adjust to new realities..

JuicyGrabs's picture

Greek Syriza leader said Europe will "beg us to take the money" even without any austerity measures.

This is the kinda` mindset that`s prevailing in Greece atm. Syriza will probably win well over 20% in next Greek elections few weeks from now.

At that point an anti austerity/IMF/Bailout government will rule Greece. Germany will have to make a very tough call at that point:

1. Give in to Greece`s blackmail and pay up without them meeting deficit targets thus setting a precendent and bad example for the fiscal compact agreement.

2. Tell Greece to piss off, default and return to Draghma which will lead to bank runs in PIIGS countries and probably force Italy and Spain to exit Eurozone. 

3. Say bye bye Euro and return to Deutsche Mark which would totally collapse Euro.

4. Form a northern fiscal union with Netherlands, Belgium, Finland.


I see 1st option(kicking can) as the easist choice. The new government in Greece will probably get the money without implementing any austerity and Germany will try to brand this as some kinda` "growth package" for Greece. There are talks already about Germany analyzing growth package for Greece. The 3d baillout will come under this form, more can road kicking and probably temporary boost for the markets again.

boiltherich's picture

This really does sound a lot like European newspapers from 1910 through 1914, an entitled elite manipulating the continent and every thing they touch sends ripples that grow into shockwaves and for years pressures build till all it took was one fringe band of assassins to kill one Archduke and send the whole world into war.  We keep wondering at how the can could be kicked for as many years now, and at how much longer it can go on, it will go on till it snaps again as it did in 1914, and 1939.  They have proven they simply cannot do what they know they must to avoid catastrophe, nobody in Europe will willingly take the blame for trillions of euro worth of failure.

Chartist's picture

honestly, if the southern euro countries had the ability to grow GDP in the first place, they wouldn't be having these problems...The whole freaking problem stems from Germany can grow its GDP while Greece etal, cannot.

Freddie's picture

They cannot grow their economies with a gold plated currency.  If they had stuck to their own currencies - we would not be in this mess.

bugs_'s picture

easy call.  the current political class are globalists NOT nationalists.  she will take the arrow for the globalist team.  what is right for Germany is not on her list of things.

Marginal Call's picture

Phoenix Capital is ZH's Chris Chase.  If you don't know who Chris Chase is check out yahoo sports blogs (shutdown corner) and read the comments on one of his "articles".

Jack Sheet's picture

yes indeed, the " screwing up the facts" bit is especially appropriate.

falak pema's picture

which wolf? American banking cabal or Marxist knee jerk?

HungrySeagull's picture

Euro ist aus, Marks ist uber Ja?

Mountainview's picture

There will be a SEURO (South) and a NEURO (North).... the question is only: Where will France be?

WmMcK's picture

Back in the franc, out of the euro if they had any sense.

bank guy in Brussels's picture

France would be King of the Mediterranean currency bloc, with the central bank likely in Marseilles.

Printing and inflating when necessary, in brotherly consultation with Spain and Italy.

machineh's picture

With impeccable Gallic logic: 'Ni dedans ni dehors.'

Jack Sheet's picture

It's incredible that this guy is still propagating the bullshit that Eurozone bailouts have one iota of relevance for voters in German local state elections. Get some f*****g German lessons and read the German Press and blogosphere before producing more of this rubbish.

Solarman's picture

What is relevant to the German voters?

Jack Sheet's picture

Local issues too numerous to go into detail here. Check out my and other comments over at the other thread today

Perhaps the best example was when the Greens got the most votes in the Baden Wuerttemberg state elections last year on their anti-atomic power wave directly after Fukushima, and also on financing pre-school child education. The green win was immediately jumped on by the foreign press as being a vote down of Murkle's PIIGS bailout policies, which was patently absurd to anyone familiar with German politics at the local level.

Deluxe186's picture

yay more horseshit from this guy...there's no way you can constitenly say omg go short it's all going down and actually have people believe you anymore

ghenny's picture

Yes, this guy seems to live in some kind of loony black and white world that has nothing to do with real people.  I bet he has never even been to Europe.  I lived there for 25 years and I speak Germand and French.  I can tell you the Europeans are much smarter and more adaptive than they get credit for.  This whole thing is a process that involves feeling out the best way to adapt to a fast changing financial, economic, technological, political and demographic environment.  European leaders are not going to blow up the EU or the Eurozone.  Germany is not going to pull out under any circumstances.  They will achieve a much closer political and economic union and they can afford to do it.  The trouble with ignorant and venal commentators like Phoenix is they take a snapshot of a situation and call it a crisis with the objective of conning investors into buying whatever "horse manure" they are selling.  They would serve all of us a lot better if they either changed their vocation and got a real job or undertook a thoughtful analysis of what the fundamentals driving events truly are.

philipat's picture

Thanks Graham. I note that you did not in this particular regurgitation of the same views, repeat yout last, latest prediction of a Eurozone collapse by May/June. Before that it was to have been the end of 2011. Now, I know you did not specify May/June of which year, but we are now half way through May and, no collapse yet? You don't think it might be that you are missing something?

Winston Churchill's picture

Trouble is ,this time he's right.

Now nobody believes his warning about the wolf being here.

bank guy in Brussels's picture

Ha! The idea that the broken clock has the right time eventually.

But the biggest negative thing about the Phoenix Capital pieces, though, is not the doomer predictions, but that Graham Summers doesn't seem to add anything fresh to the discussion ... He seems to just repeat the things we've all read on ZeroHedge, plus a few classically-connected places (like Ambrose Evans-Pritchard, cited above), and doesn't seem to supply any fresh anecdotes or perspective or depth.

Just a dry repeat of ideas we nearly always have seen before, and then his pitch.

So I am a little surprised he is still here as a regular ...

Would rather have back MadHedgeFundTrader and Leo Kolivakis - they were much more entertaining.

Jim Sinclair should be a Contributor here - though sometimes eccentric, he has some sharp, terrific insights on some things well before anyone else.

Not just classic Sinclair themes like 'QE to Infinity', but, for example, Jim Sinclair is one who really saw early the huge implications and consequences of locking Iran out of the Swift system ... with radical consequences now for the entire global financial system that are still unfolding.