Why Germany Is Unlikely to Write the Check

Phoenix Capital Research's picture

 

 

At the end of the day, every EU solution/bailout/ intervention hinges on whether or not Germany will write the check.

 

The EBC can promise this and that, but unless Germany’s signature is on the check, all of this is just posturing and verbal intervention.

 

With that in mind, it’s worth considering just how much Germany would be willing to spend. Historically the single largest transfer payment ever made by one country to another was the Marshall Plan, which saw the US make a transfer payment of slightly over 5% of its GDP to Europe as aid following WWII.

 

Given this, it is highly unlikely Germany will foot the bill for a larger amount than this on a per-GDP basis. True, Germany has promised more than this in the form of its supposed contributions to various EU bailout funds, largely due to the fact that German banks are exposed to the PIIGS and other problem countries of Europe.

 

However, I sincerely doubt that when the tab is drawn up and the funds are actually needed, Germany will actually write the check for an amount greater than 5% of its GDP (roughly €140 billion).

 

Thus, the key issue is whether the tab comes due before Greece or Cyprus (or Italy at this point) else leaves the Euro. Angela Merkel is up for re-election this year, which is a big reason why Germany was demanding depositor confiscation to help fund the Cyprus bailout (she cannot afford to look soft).

 

Moreover, the German economy is proving weaker than originally forecast.

 

Economic advisers to the German government on Monday slashed their forecast for 2013 growth to 0.3 percent from 0.8 percent, blaming a sharp fourth-quarter contraction, and said weaker foreign trade and investment would weigh on growth.

 

The advisers, traditionally known as the "wisemen", predicted capital investment would drop by 3 percent this year and saw foreign trade subtracting 0.3 percentage points from German gross domestic product (GDP).

 

http://www.reuters.com/article/2013/03/25/germany-economy-idUSB4N0AU02J20130325

 

Between Merkel’s re-election bid, and the German economy weakening, bailing out Europe is going to be a lot more politically unsavory than it has in the past. The question now is whether Cyprus or someone else calls Merkel’s bluff.

 

 

If you’re an individual investor worried about what Europe’s Crisis really means for your portfolio, we’ve published a FREE Special Report outlining exactly that. It’s titled, What Europe Means For You and Your Savings.

 

In this report, we outline the risks Europe’s banking crisis holds not only for those in Europe, but for savers around the world. We also explain how this crisis will most likely unfold, including which areas are most at risk in the financial system. And we cap it off by listing multiple backdoor plays on Europe that investors can use to profit from Europe’s Crisis.

 

You can pick up a FREE copy here:

 

http://gainspainscapital.com/what-europes-collapse-means-for-your-savings/

 

Thank you for reading!

 

Graham Summers