Two Possible Outcomes For the European End Game

Phoenix Capital Research's picture

With the European End Game now in sight, the primary question that needs to be addressed is whether Europe will opt for a period of massive deflation, massive inflation, or deflation followed by inflation.


Indeed, with Europe’s entire banking system insolvent (even German banks need to be recapitalized to the tune of over $171 billion) the outcome for Europe is only one of two options:


1)   Massive debt restructuring

2)   Monetization of everything/ hyperinflation


These are the realities facing Europe today (and eventually Japan and the US). Either way we are talking about the destruction of tens of trillions of Euros in wealth. The issue is which poison the European powers that be choose.


Personally, I believe we are going to see a combination of the two with deflation hitting all EU countries first and then serious inflation or hyperinflation hitting peripheral players and the PIIGS.


In terms of how we get there, I believe that in the next 14 months, the following will occur.


1)   Germany and possibly France exit the Euro

2)   ALL PIIGS defaulting on their debt

3)   Potential hyperinflation in the PIIGS and peripheral EU countries


Regarding #1, we are already beginning to see hints of this development in the press:




Ministers are understood to be deeply concerned that French President Nicolas Sarkozy and Germany's Chancellor Angela Merkel are secretly plotting to build a new, slimmed down Eurozone without Greece, Italy and other debt-ridden southern European nations.


Well-placed Brussels sources say Germany and France have already held private discussions on preparing for the disintegration of the Eurozone.




German and French officials have discussed plans for a radical overhaul of the European Union that would involve setting up a more integrated and potentially smaller Euro zone, EU sources say.


"France and Germany have had intense consultations on this issue over the last months, at all levels," a senior EU official in Brussels told Reuters, speaking on condition of anonymity because of the sensitivity of the discussions.


"We need to move very cautiously, but the truth is that we need to establish exactly the list of those who don't want to be part of the club and those who simply cannot be part," the official said.


With no one willing to foot the bill for the EFSF the markets are hoping Germany will step in and save the day. However, the German constitution forbids Germany from backing Euro-bonds.


            German EconMin: court verdict rules out Euro bonds


German Economy Minister Philipp Roesler said on Thursday the constitutional court's ruling on Euro aid made it clear that joint Euro zone bonds were not an option.


Addressing left-wing opposition parties in the Bundestag lower house of parliament, Roesler said: "You continue to talk up Euro bonds although the constitutional court yesterday made it clear that as transfer union such as the one you propose on the left will never be possible, never be allowed."


"We don't want it politically, either, and we will not let the German taxpayer be obliged to pay for the debt of other countries," he said in a parliamentary budget debate.


Moreover, Germans will simply not permit the monetization of debt. Weimar’s hyperinflation happened in the early 1920s and is still fresh in the memories of the German people (those who lived through it undoubtedly told their children and grandchildren about it). So the German people will not tolerate price instability in any form.


Germany is not alone in having little or no desire to attempt to backstop the system. Indeed, NONE of the G20 countries wish to support the EFSF from a monetary standpoint (yet another sign that the bailout game is ending).


            No new Euro zone money for debt crisis at G20


The Euro zone won verbal support but no new money at a G20 summit on Friday for its tortured efforts to overcome a sovereign debt crisis, while Italy was effectively placed under IMF supervision.


Leaders of the world's major economies, meeting on the French Riviera, told Europe to sort out its own problems and deferred until next year any move to provide more crisis-fighting resources to the International Monetary Fund.


"There are hardly any countries here which said they were ready to go along with the EFSF (Euro zone rescue fund)," German Chancellor Angela Merkel told a news conference.


So… everyone claims they want to support the EFSF… but no one wants to commit the money. Moreover, Germany’s constitution forbids the backing of Euro bonds… and the EFSF itself has failed to stage even a three billion Euro bond offering under normal market conditions.


Again, the bailout game is ending. Under these conditions, I believe Germany and France will push to either:


1)   Leave the EU

2)   Draft legislation that allows countries to leave the Euro but remain in the EU

3)   Propose kicking out the PIIGS from the Euro


Whichever one of these options Germany opts for, the Euro will collapse. Indeed, the primary reason the Euro has been rallying since October is due to French banks and others selling assets (buying Euros) to recapitalize themselves.


Put another way, the Euro rally is in fact NOT a sign of currency strength. Instead, it is a sign that the major players are moving to cash (Euros) in an attempt to lower their exposure to PIIGS’ debt.


Indeed, if we look at the bond or credit markets, it’s clear we’re into a Crisis far greater than 2008. Forget the stock market rally. Stocks ALWAYS get it last (just like in 2008). And before the smoke clears on this mess we’re going to see sovereign defaults, bank holidays, riots, and more.


Many people will lose everything in this mess. Yes, everything. However, you don’t have to be one of them. Indeed, my Surviving a Crisis Four Times Worse Than 2008 report can show you how to turn the unfolding disaster into a time of gains and profits for any investor.


Within its nine pages I explain precisely how the Second Round of the Crisis will unfold, where it will hit hardest, and the best means of profiting from it (the very investments my clients used to make triple digit returns in 2008).


Best of all, this report is 100% FREE. To pick up your copy today simply go to: and click on the OUR FREE REPORTS tab.


Good Investing!


Graham Summers


PS. We also feature four 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 my proprietary Crash Indicator which has caught every crash in the last 25 years or the best most profitable strategy for individual investors looking to profit from the upcoming US Debt Default, my reports covers it.


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sbenard's picture

Two outcomes: UGLY or DISASTER!

Bob Bercy's picture

The Daily Express...come on you gotta be kidding! What does the National Enquirer have to say on the subject?

Jack Sheet's picture

This post relies too much on press statements of  public figures which are almost always lies. You need to realize that the EUR is a political project and the EUR zone will be kept intact by the Politbüro in Brussels and their hordes of satraps in the national governments and big banks at whatever cost. This includes all the PIIGS turning into smoke and ashes and > 10% price inflation in the currently AAA EUR members. Elimination of countries from the EUR zone would result in an intolerable loss of power for the architects of the new world government and the national political leaders they have bought. J Rickards (new book  Currency wars) makes it quite clear that the US and China will not permit  a weak Euro because they have first priority in trashing their currencies.

Zero Govt's picture

the Politburo in Brussels have absolutely no bearing on the Euro stage ...Burruso and Van Rumpoy, like Trichet, are deposed clucking chickens while the French and German farmers discuss how to manage the cattle and poultry

National self interest has overtaken internationalisation and collectivism ...Brussels carries no weight in these discussions

Market Man's picture

The only thing certain is that European banks will be nationalized.... they are insolvent plus politicians want to run the banks for their own benefit.

Other than that I think the Euro survives and the current crisis is used to gain financial control over the PIIGS....more centralized power which politicians always want.

In other words, what is happening is not totally an uncontrolled series of events, but a way to get Europe to where the German politicans want it to be.

Georgesblog's picture

Everything is being thrown in the pot. In the end, this debt soup will gag everybody. They've been playing with debt, and calling it money. Now, they need money, and have none. It's as though everyone has been eating cardboard, and calling it food.

Buck Johnson's picture

They are going to make the EU smaller and kick out the rest, pure and simple.

donsluck's picture

Which makes the German bonds a very good buy, no?

cbaba's picture

Thank you Graham. Its a very good article. You have made a good and clear summary of unfolding events.

hannah's picture

i think the super rich bank owners will 'do the right thing' and take a loss on all their wealth...........WTF....................there are NO F"ING CHOICES.

THERE IS ONLY ONE OPTION.........................PRINT.

booboo's picture

I heard that France and Germany are meeting in a rail car in the forest of Compiègne to iron out the details.....wait, that was the armistice treaty.

ShankyS's picture

Well done Graham, but you never got to the War part of the story. 

fourchan's picture

those essays come in thoughtful and end like spam. blech. <- mad magazine  word

e2thex's picture

They're going to choose a G.E. washing machine and pass on door 4.

Who the fuck believes this copy? This is an insult to anyone twenty-eight inches tall with a white beard and a t-shirt with number 24 on the back.

walküre's picture

Appreciate the thought process. This is like watching a train wreck in slow motion, that's for sure. The debt is certainly a massive problem but we've been here before and debt was dealt with then. Now we are at a point where the debt issue is on everyone's mind and the minds are more informed than they were. During Weimar not many understood what was going on and why hyperinflation happened. Today there is so much information out there that disects the financial industry from every different angle and everyone (if they care to look) can learn that the banks are really just cooking with water and that there is no magic money fairy on Wall Street. The money in circulation is already based on a growth that had been completely unsustainable for years. Only cheaper and greater loans could keep the charade going. That came to an abrupt end in 2008 and the world noticed, the Emperor has indeed no clothes.

Fast forward to 2011 and the European debt crisis is reaching the tipping point. There is no real solution other than massive debt restructuring and subsequent debt jubilee. Debts need to get slashed, budgets need to get trimmed, people will suffer and banks will be dissolved. Now or after the Q.XYZ round of monetization.

In the end it doesn't matter if Italy can refinance at below 5%. Market is driving rates up so the IMF (Fed) is coming to the rescue as lender of last resort. For how long? Who knows? Italy is not going to be in a different position next year or the year after. The proposed budget cuts are all deflationary. Less economic activity equals lower revenues which in turn reduces the amount of funds available to service debt.

Everyone can figure this out and in time, everyone will.

AngryPiglet's picture

If ECB committed to umlimited monetization, it is unlikely that they will actually have to go through with it.  I think this is the best "once-and-for-all" solution, but Merkel wants to secure more centralized fiscal control and austerity measures before implementing "unlimited monetization" by ECB.  This in combinatio with "redemption bonds", where participation would be optional and based on certain precedent and ongoing conditions.  Treaty changes are too difficult at this point, so EU will try to use bilateral agreements.

falak pema's picture

merkel says deflate; sarkozy has been saying inflate to save the world. Has he changed tunes? What is the strategy behind small club of Euro? And why is IMF saying it MAY save Italy alone w/O ECB, and what is ECB gonna do for the others, and what becomes those who get kicked out of slim Euro group? Won't it start contagion anyway? How much pain can the french/german banks take if excluded PIGS go belly up?

Many balls still in the air, nothing solved. There are more generals in this mexican army than soldiers.

AngryPiglet's picture



Regarding your "Surviving a Crisis Four Times Worse Than 2008", I emailed you some questions, and no one responded to me.  I paste my email to you here in the hopes that it will get your attention.


To the editor

I regularly read your columns on ZeroHedge, so I read your "How to Survive 3rd World America: Survive a Crisis Four Times Bigger Than 2008."  I have to say that you make a lot of claims and suggestions without backing them up.  If there is some misunderstanding, would appreciate your clarification.


From page 2  "Well, the market for derivatives that are based on interest rates is over $196 TRILLION in size.  Put another way, there is the potential for a Crisis FOUR times bigger than 2008 still lurking in the derivatives market."


1) Are you saying the notional value of interest rate derivatives are $196 TR?  Where did you get this figure from?  So the notional value of all derivative contracts is $200 TR and 196 of that is interest rate linked derivatives?  So there is only $4 TR worth of non-interest rate linked derivatives?

2) When you say "If you’ve ever wondered why the Fed is so obsessed with keeping interest rates low and buying US Treasuries (to insure bond yields/ interest rates don’t soar), you now know." Can you please clarify why the Fed is compelled to keep rates low in order to avert a disaster related to interest rate derivatives?  Are you suggesting that US banks wrote $196 TR in interest rate derivatives that payout if interest rates go up?  Thank you. 

sydneybound's picture

Regarding your first question, I`m not sure where $200T of notional value of derivatives comes from, see the following via ZH via ISDA report:


That report states that there is close to $700T of notional value to derivatives.


Regarding the second question, I think we would love to take a shot at an answer but the question and quoted comment needs to be put into context. If you do that, then we might be able to help you.  I think I know what the answer is, but I need a proper question.



AngryPiglet's picture



In case there is some confusion, what I posted above is my email to Graham of Phoenix Capital for clarification, not questions that I am contemplating.

sydneybound's picture

I know, but they are still questions that might have very simple answers where we can help.


Unless you are not looking for answers, but simply making a point using questions



akak's picture

EVERY nation currently using the euro has experienced hyperinflation at least once within the last century, and I am willing to put real money down on the bet that each one of them will experience it again within the next five years.

Smiddywesson's picture

EVERY nation currently using the euro has experienced hyperinflation at least once within the last century, and I am willing to put real money down on the bet that each one of them will experience it again within the next five years.

Yes, and another observation from above is this debt isn't going away.  No matter what they do, it will hang over their heads forever until they default or print, there really is no other alternative.  So even if the politicians in place now don't want to print, they will get thrown out eventually because of the stresses imposed on society by the debt, and their successors will print.  Print or die, politicians understand this.

Conclusion in When Money Dies:  The longer the crisis goes, the less the participants have a self interest to address the problems and the more it is in their interests to print.

Ahmeexnal's picture

make that five months.

covert's picture

Germany will "make it" and france will fail.


donsluck's picture

The salient question is: does Germany keep the Euro (or at least honor it) so their Euro based bonds are legitimate? If so, then their bonds are a good buy since, according to the article, the bond sale failure was "engineered" and therefor the interest they have to pay is also artificially high.