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Merkel's Walking a Tightrope... If She Falls, the EU Could Implode

Phoenix Capital Research's picture





 

 

The single most important issue for Europe today remains Germany on both an economic and political front.

 

German Chancellor Angela Merkel has walked a tightrope over the last few years of keeping the EU together without infuriating the German populace to the point of having to abandon ship.

 

To do this, Merkel has maintained a firm stance of “we’ll write the check provided conditions are met” much as a parent would give a child his or her allowance provided the child performed its chores satisfactorily. In the case of German, the “chores” are required conditions of austerity measures and budgetary requirements in exchange for bailout funds.

 

By doing this, Merkel is able to play hardball on an economic front (having failed to meet its German-required financial targets Greece had to wait an additional six months to receive another installment of its Second bailout) without appear too hard-nosed on a political front (she continually pushes to keep the Euro together, expressing a willingness to help other nations… as long as they meet her budgetary requirements).

 

The policy has thus far been a success with Merkel’s approval rating soaring to its highest level since 2009 (before her re-election bid). However, the latest state election in Germany might upset this situation.

 

Germany's center-left opposition won a wafer-thin victory over Chancellor Angela Merkel's coalition in a major state election Sunday, dealing a setback as she seeks a third term at the helm of Europe's biggest economy later this year.

 

The opposition Social Democrats and Greens won a single-seat majority in the state legislature in Lower Saxony, ousting the coalition of Merkel's conservative Christian Democratic Union and the pro-market Free Democrats that has run the northwestern region for 10 years. The same parties form the national government.

 

The 58-year-old Merkel will seek another four-year term in a national parliamentary election expected in September. She and her party are riding high in national polls, but the opposition hoped the Lower Saxony vote would show she is vulnerable.

 

The outcome could boost what so far has been a sputtering campaign by Merkel's Social Democratic challenger, Peer Steinbrueck.

 

"This evening gives us real tailwind for the national election," said Katrin Goering-Eckardt, a leader of Steinbrueck's allies, the Greens. "We can and will manage to replace the (center-right) coalition."

 

However, the close outcome also underscores the possibility of a messy result in September, with no clear winner.

 

http://bigstory.ap.org/article/merkel-risks-election-year-setback-state-vote

 

To understand the significance of this, you need to understand a key difference between the US and Europe. In the US, the economy often drives politics (often but not always). In Europe, politics drives everything.

 

You will never hear a discussion of “how involved should the Government be in the economy?” in most of Europe; it is just assumed that the Government should always be involved to a significant degree. The question is whether it should be a lot (the public sector accounts for 30% of jobs in Germany) or almost entirely (the public sector accounts for 56% of jobs in France).

 

With that in mind, Merkel is up for re-election in the fall of this year (likely in September). Her bid for re-election will be a major issue for the future of the EU and the Euro in 2013.

 

The other two candidates for the job are Peer Steinbrück, former Finance Minister to Merkel who has been extremely critical of Merkel’s handling of the EU Crisis and Rainer Brüderle who believes that Greece leaving the EU would not be a “calamity.”

 

Obviously whoever wins this election will change the political landscape for Europe significantly. As a result, the run up to this election will have a significant impact on the markets for 2013, much as the Obama-Romney Presidential campaigns had significant impacts on the US markets in 2012.

 

An important issue for this campaign will be the German economy. Germany is the second largest exporter of goods in the world behind China. And the German economy is getting slammed due to:

 

  1. The EU economy collapsing.
  2. The ECB’s interventions have pushed the Euro higher hurting export profits.

 

By most counts Europe is an economic disaster. Southern countries such as Spain and Greece have begun to resemble third world countries with commensurate poverty and malnutrition. However, even when we include stronger economies such as Germany, the EU as a whole is back in recession as of September 2012. With 71% of German exports going to the EU, this is a real problem for the German economy.

 

Regarding #2, every tick higher in the Euro means less profits for Germany. And the Euro has been rising dramatically since July when the ECB first hinted at providing unlimited bond buying to backstop the EU banking system.

 

As a result of this, the German economy is estimated to have shrunken 0.5% in the fourth quarter of 2012. If things continue to worsen here, Germany’s population will grow increasingly unhappy with the prospect of more EU bailouts. And with Merkel battling for re-election this year, this could potentially upset her high wire act of balancing German voter sentiment with a pro-EU agenda.

 

With that in mind, the recent state election loss is a bad omen for Merkel. True, the loss occurred by a razor thin margin. But as we mentioned before, politics is everything in Europe. The more energy Merkel has to devote to wooing German voters the less energy she will have to focus on maintaining her “we’ll backstop the EU” policy.

 

This will make for a very volatile year in European markets as the markets will be hinging on German officials’ statements throughout the campaign trail. With that in mind, the German economy will be an absolutely critical issue both for the German Federal elections and the solidarity of the EU as a whole in 2013.

 

We have produced a FREE Special Report available to all investors titled What Europe’s Collapse Means For You and Your Savings.

This report features ten pages of material outlining our independent analysis real debt situation in Europe (numbers far worse than is publicly admitted), the true nature of the EU banking system, and the systemic risks Europe poses to investors around the world.

It also outlines a number of investments to profit from this; investments that anyone can use to take advantage of the European Debt Crisis.

Best of all, this report is 100% FREE. You can pick up a copy today at:

http://gainspainscapital.com/eu-report/

Best

Phoenix Capital Research

 

 

 

 


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Sun, 02/03/2013 - 05:34 | Link to Comment skydrake
skydrake's picture

 

Why " If She falls, the EU could implode"?

 

The center-left opposition parties, Social Democrats (SPD) and Greens, are more Europeans than the Cristian Democratic Union (CDU) of Merkel. The Euroskepitc party is the Democraticl Liberal Party (FDP), a right party allied of the CDU in the Grossekcoalition and without any hopes to come back at the Government in the case of victory of SPD.

Whitout Merkel it will be more simple to fine agreements s with bailed countries.

Sun, 02/03/2013 - 05:33 | Link to Comment skydrake
skydrake's picture

 

Why " If She falls, the EU could implode"?

 

The center-left opposition parties, Social Democrats (SPD) and Greens, are more Europeans than the Cristian Democratic Union (CDU) of Merkel. The Euroskepitc party is the Democraticl Liberal Party (FDP), a right party allied of the CDU in the Grossekcoalition and without any hopes to come back at the Government in the case of victory of SPD.

Whitout Merkel it will be more simple to fine agreements s with bailed countries.

Sat, 02/02/2013 - 21:43 | Link to Comment malek
malek's picture

It is almost impossible for Merkel to lose that upcoming election.
Any voter thinking Merkel is too soft on EU budgetary issues, only has opposition choices even softer.

Sat, 02/02/2013 - 18:51 | Link to Comment The Reich
The Reich's picture

Watch out for the rising of a Anti Euro / Anti Brussels movement at the September election.

Sat, 02/02/2013 - 18:43 | Link to Comment CDNX fan
CDNX fan's picture

Go back and read "The Winds of War" by Herman Wouk - best analysis of the German psyche ever written. Even my late WWII-vet uncle told me that the initial wave of German soldiers that invaded Poland in '39 were absolutely unstoppable - disciplined, tough, fit and smart - they were soldiers, not Nazi's and had the generals been in charge instead of that maniac, ex-homeless bum Hitler, they would be goose-stepping all over the U.K. and the rest of Europe today. That same DNA runs strong in the Fatherland in 2013 so don't ever write off the Krauts. 

(Disclosure: I have zero German in me).

Sat, 02/02/2013 - 17:08 | Link to Comment auric1234
auric1234's picture

Why would German people care if the ECB rescues every insolvent country in the EU? If a citizen is concerned, all he has to do is sell all his euro-denominated assets, and exchange them for real money (or buy real things).

Inflation? I no longer give shit about it.

 

Sat, 02/02/2013 - 19:48 | Link to Comment tango
tango's picture

They care because in the end it is Germans who must foot the ECB. Since there is no free lunch, it will always end up that productive people are the ones left with the bill since (after all) they are the ones making money. I see zero chance for change in Germany - both members of the Left (SD & Greens) are vigorously pro-EU and the only one that questions is (Free Dems) will not even pull 5% - so much for German concern.

Sat, 02/02/2013 - 18:04 | Link to Comment From Germany Wi...
From Germany With Love's picture

How and why this report is misleading:

'The other two candidates for the job are Peer Steinbrück, former Finance Minister to Merkel who has been extremely critical of Merkel’s handling of the EU Crisis and Rainer Brüderle who believes that Greece leaving the EU would not be a “calamity.”'

1.  Rainer Brüderle deserves no mention here, he is no candidate from the job; this is entirely made up. It's a straight lie.
2. The alternative to Merkel is indeed Steinbrück whose policies are even more pro-Euro than hers. So Germans actually don't have a choice on the matter.

Do not expect any resistance by the populace of Germany unless there is real economic hurt for the middle class or lower class here.

Sat, 02/02/2013 - 18:46 | Link to Comment Sandmann
Sandmann's picture

There is the option of Splinter Parties making the Bundestag more like Weimar however. There is supposed to be a new Electoral Law after the Verfassungsgericht rejected the last one. There is also the issue of E-On going on strike and the whole Energiewende disaster to make voters wonder why Merkel is such a Greenie........it might simply be that lots of voters abstain

The real issue is not the Euro but the German living standards being depressed for over a decade to transfer purchasing power to PIIGS states at the expense of German Workers who now pay higher taxes and higher food prices to fund German exports to PIIGS states financed with TARGET2 claims on the Bundesbank

Sat, 02/02/2013 - 15:18 | Link to Comment Hannibal
Hannibal's picture

Fuck all fiat paper crunching. Think overview-big picture.  "Revolution is just a shot away"

http://www.brotherjohnf.com/archives/126343

Sat, 02/02/2013 - 14:01 | Link to Comment Bicycle Repairman
Bicycle Repairman's picture

If Merkel gets replaced her replacement will do exactly what they would have told Merkel to do.

Sat, 02/02/2013 - 13:38 | Link to Comment Nussi34
Nussi34's picture

"The ECB’s interventions have pushed the Euro higher hurting [German] export profits."

This hurts the commodity producers in the ClubMed countries, but not really the speciality machine builders of Germany. If someone wants cheap he can buy a Chinese or whatever machine at less than half the cost of the German equivalent. There are other things that matter, delivery time, customization, quality,...

"Southern countries such as Spain and Greece have begun to resemble third world countries with commensurate poverty and malnutrition."

They actually always have been like this. It just was covered over with cheap credit from the North.

"With 71% of German exports going to the EU, this isa real problem for the German economy. "

Only 40% of exports go to the Eurozone and it is shrinking. When we still had the DMark it was 46%. So much to the argument that you need a weak currency to export...

Sat, 02/02/2013 - 13:09 | Link to Comment Volaille de Bresse
Volaille de Bresse's picture

"I´m sorry to break this to you, but the only threat to Merkel is from parties that are arguably more pro-EU than hers"

 

Make that : "parties that are arguably more pro-BANKS than hers" No one is pro-Europe anymore : everyone knows it's dead and it'll take 30 years to be revived...


Sat, 02/02/2013 - 16:03 | Link to Comment From Germany Wi...
From Germany With Love's picture

You are very, very wrong here. Even Professor Sinn is pro-Euro, he just wants countries to be able to temporatily leave the currency.

Sat, 02/02/2013 - 13:04 | Link to Comment Volaille de Bresse
Volaille de Bresse's picture

She's sitting on a big barrel of gunpowder you didn't mention : the newtork of regional banks which are technically bankrupt. 

http://citywire.co.uk/wealth-manager/slis-hudson-german-regional-banks-m...

 

But YOU German ZH readers now know :-)

Sat, 02/02/2013 - 12:33 | Link to Comment Notarocketscientist
Notarocketscientist's picture

Heheh....  yes that is entirley true.

Graham is like your batty old uncle who's been daft from birth... but he's amusing to have around ... so we humour him

Sat, 02/02/2013 - 12:22 | Link to Comment zilverreiger
zilverreiger's picture

Peer Steinbrueck has no chance, hes a fat faced banker buddy already digging his own grave with little mini scandals.

 

Sat, 02/02/2013 - 11:36 | Link to Comment HoaX
HoaX's picture

I´m sorry to break this to you, but the only threat to Merkel is from parties that are arguably more pro-EU than hers.

 

Sat, 02/02/2013 - 12:24 | Link to Comment gould's fisker
gould's fisker's picture

I'm not sure that matters on this particular dynamic--if the german public heads for the euro exit emphatically as Germany goes deeper into recession caused by diminished Euro markets to export to, and a rising and strong Euro to float periphery countries' bond issuances, which in turn make German exports increasingly uncompetitive, the current model collapses--because Euro land collapses when the German public walks which Merkel has been creative in preventing.  Doesn't matter who's in charge when/if this happens.

Sat, 02/02/2013 - 16:02 | Link to Comment From Germany Wi...
From Germany With Love's picture

Merkel didn't have to be very creative... she just needed to boil this frog slowly enough - which she is good at.

However you are right in that regard: if the German economy goes south, then questions why we are promising to pay for other countries will grow. Always remember that German's are not rebellious - up to a point where the pain can't be ignored anymore.

Sat, 02/02/2013 - 16:57 | Link to Comment Bob
Bob's picture

Don't piss off the Germans.

Coooool people almost to a fault.  But do not.cross.that.line. 

And I'm only half German. 

Sat, 02/02/2013 - 13:22 | Link to Comment bank guy in Brussels
bank guy in Brussels's picture

The Germans gettick ticked off about the bailouts will be somewhat synchronous with southern Mediterranean countries tired of being screwed by the euro and foreign-imposed economic brutality ... southern countries will leave the euro before the Germans can finish arguing about it

And that will quickly mushroom into bank and insurance company implosions in Germany and elsewhere

The aftermath, tho, I think will be with the northern Germanic, Scandinavian and Low Countries keeping the euro ... the Mediterranean and even France out of it

There is enough economic convergence in the northern nations that there is upside to keeping the euro on that 'core' basis rather than a New Deutschmark for Germany alone

It will be a wild ride

Sat, 02/02/2013 - 13:39 | Link to Comment Nussi34
Nussi34's picture

"even France" is really funny. They are god dammed Frankrupted!

Sat, 02/02/2013 - 12:40 | Link to Comment TPTB_r_TBTF
TPTB_r_TBTF's picture

Noone asked the Germans if they wanted to particpate in the Euro.  The Euro was shoved down their sheeple throats.  Why would anyone let them leave Euroland?  What makes you think the German people have any say in the matter?

Sat, 02/02/2013 - 19:44 | Link to Comment tango
tango's picture

I heard an "unofficial" poll by one of the networks revealed (surprise) that almost exactly 50% were pro-Eu with a undecided of 20%.  That's about as pro-Eu as a nation that is supporting the EU zombies can get.  In fact, I consider it remarkable in its acceptance of the status quo.

Sat, 02/02/2013 - 16:35 | Link to Comment gould's fisker
gould's fisker's picture

They still have a say in which party has the majority in the Bundestag so what they say collectively through that ability matters--I'm not saying its politicians are any more altruistic than anybody else's, but what all politicians have in common is wanting to keep their seats.  So they don't have to vote to "leave" Euroland--if Germany withdraws its fiscal support and bond rates for Italy, Spain and France shoot up its game over--they don't have to leave, Euroland implodes.

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