Guest Post: Why Germany Is Going To Exit The Eurozone

Tyler Durden's picture

Submitted by Alasdair Macleod, via Peak Prosperity,

It's becoming clear that there is only one sensible solution ahead of us as the Eurozone’s problems evolve: Germany and the other countries suited to a strong currency should leave. If they do, the European Central Bank (ECB) will be free to pursue the easy money policies recommended by Keynesians and monetarists alike. It's increasingly clear that Germany has no option but to behave like any creditor seeking to protect its interests – and do its best to defuse the growing resentment against her from the Eurozone’s debtors.

However, leaving the Eurozone is a political and legal, even seismic wrench, reversing decades of historical progression towards political and economic union.

The saga of the Eurozone reads like an old-fashioned novel – with a beginning, a middle, and presumably an end. In the beginning we are introduced to the characters, the middle is where the action is, and the end is plainly predictable. There are two broad types of story: fairy tale and murder mystery.  A fairy tale starts with a handsome prince, who meets and conquers evil and woos the princess, and at the end they marry and live happily ever after.  A murder mystery starts with a murder, the middle is littered with clues (many of which are designed to put the reader off the scent), and the perpetrator of the crime is revealed at the end. The starry-eyed visionaries behind the Eurozone embarked on a fairy tale and instead have found themselves as characters in a murder plot. The difference is not the outcome, but how many pages we have left to turn to the end of the story.

The victim, of course, is the great European ideal, the political project that was meant to unite the European nations. The murderer is sound economic theory, which has been ignored, even trampled underfoot, but has resurfaced in the guise of reality. None of the actors foresaw (let alone can accept) this turn of events, and to get a flavour of the current mood we only have to listen to Manuel Barroso, President of the European Commission, whose response is to retreat into yet more regulation and statist control in denial of all reality.

Germany and France are centre-stage; in the post-war years they were partners in forming an economic and political block on Soviet Russia’s western boundary, containing the spread of communism. And by uniting the nations of Continental Europe, the reasons for war between them would be neutralised. These objectives were achieved, not so much by the formation of the European Union, but because the USSR’s communist model ensured the eventual economic collapse and disintegration of Russia and her satellites. And after the Franco-Prussian War and the First and Second World Wars, Germany lost all appetite for belligerence anyway.

France, with a little help from her Anglo-Saxon friends, was cock-of-the-roost after the two world wars, so much so that De Gaulle, France’s post-WW2 leader, was confident enough to refuse to join NATO, building France’s own arms capability instead. This sharply contrasted with Germany, who disavowed any military capability of her own and submitted completely to the military jurisdiction of NATO. This was reflected in post-war politics, with Germany quietly rebuilding her shattered economy, basing it on the preservation of savings, while France sought to build the state. The background to our story is one involving neighbours presenting a common front, but with very different attitudes toward life.

It is tempting to think that none of this matters, but it does. Politics, and not economics, are centre-stage. The German establishment is fundamentally reluctant to lead the Eurozone, being more interested in protecting Germany’s commercial interests. The French retain perhaps a sense of insecurity expressed in their jingoism. The former president, Sarkozy, visibly epitomised this. The new president, Hollande, expresses his nationalism by promoting French socialism. While Frau Merkel and M. Sarkozy were able on the surface to rub along together, Hollande’s denial of fiscal austerity exposes Germany’s underlying problem: As the rich and successful partner, it is now expected to subsidise the rest of the Eurozone for as long as it takes.

Germany is now in the unhappy position of a lender who has committed large amounts of money to a number of borrowers, who find themselves unable to repay and require further finance. Does it dig deep and find more money in the hope that it does not have to write its investments off, or does it say enough is enough? But it is worse than that; it hasn’t enough money itself to throw at these debtors, with the likely costs certain to exceed all its tax revenues. To give you a sense of the problem, in very round figures Germany’s tax revenues are €1.2 trillion, while the estimated costs of keeping defaults in the Eurozone at bay stand at close to €4 trillion.

But it gets worse still; it has no control over the money flowing through its own central bank. The chart below is of the money the Bundesbank automatically has to lend the other Eurozone central banks under the TARGET2 settlement system. Some of this figure, by the way, is included the in the total estimated €4 trillion.

This balance, which reflects private sector capital fleeing from the Eurozone debtor nations and being lent back to their central banks, stood at €751bn ($975bn) at the end of August, representing perhaps one sixth of all Eurozone deposits. On top of this, Germany and a few others are being asked to bankroll these nations’ governments. You only have to look at the rate of increase to get a sense of the banking runs being suffered in the weaker states and to understand the scale of the underlying crisis.

Germany’s electorate is becoming acutely aware of the enormity of the task. In theory, under the European Stability Mechanism (ESM), which is the vehicle for bailing out debtor nations unable to fund themselves, each Eurozone nation has to contribute. While one can understand the case for a nation being bailed out not having to contribute, does this mean that Italy, for example, must contribute to a bailout for Spain, and if so, how is it going to come up with the money? Obviously it cannot. And what about France, with its inward-looking economic model and with its own budget deficit running at over 6% and rising? It's silent on this matter, but it is a reasonable guess that it will make diplomatic excuses. This is the background to the German Constitutional Court’s judgment delivered on September 12, 2012.

German Constitutional Court’s Judgment

Last month on behalf of GoldMoney, I spoke to Professor Markus Kerber, who is one of the German academics that led the action placed before the Court on behalf of about 37,000 citizens. The Constitutional Court was asked to block presidential ratification of the German parliament’s approval of the ESM. Central to his case was the rapid increase in the bailout costs faced by Germany. Kerber told me that in the deposition to the court, the estimated costs for which Germany would be liable and that can be substantiated are in the order of €2 trillion, with further commitments of €1.7 trillion in the pipeline. This is in stark contrast with a similar action bought before the court a year ago, where the costs appeared to be only €170 billion. That action was rejected on the grounds that Germany could effectively afford it, in the view of the judges. So it was entirely logical that they ruled that the German President could ratify parliamentary approval of the ESM, so long as Germany’s contribution is capped at the level authorised by parliament at €190 billion.

This is small change in the scheme of things, and the ESM will require considerably larger contributions from Germany, assuming that an immediate and miraculous economic recovery doesn’t happen for the debtor nations. It doesn’t even begin to tackle Spain’s problems, let alone Italy’s. The larger contributions required for these debtors can only be obtained by going back to parliament and asking for an increase; something that is getting progressively more difficult as the general election approaches. But the Court went further, by ruling that the ESM can only use funds directly contributed to it and cannot borrow by issuing bonds in its own right or operating as a bank. This eliminates any hope that the ESM can be levered up.

Even more startling is its ruling with respect to the ECB and its recently announced Outright Monetary Transactions (OMT), and I quote from an English translation:

For an acquisition of government bonds on the secondary market by the European Central Bank aiming at financing the Members’ budgets independently of the capital markets is prohibited as well, as it would circumvent the prohibition of monetary financing (see also Recital 7 of Council Regulation (EC) No 3603/93 of 13 December 1993 (OJ L 332 of 31 December 1993, p. 1)).

The Court ruling therefore appears to put a straitjacket on the ECB as well as the ESM, together with all the bail-out plans cobbled together so far. The Court has basically made it impossible for unelected officials to commit German citizens’ funds without parliamentary approval and for the Bundesbank to condone the ECB’s actions.

The immediate response from German politicians has been supportive of the judgment, because it does not seek to overturn the Bundestag (the German parliament), and frankly, what else can they say without disrespecting the law? Privately, they must be reflecting on not only the difficulties or even the impossibility of going back to the Bundestag for ratification of even greater contributions to the ESM, but also they must be wondering where on earth they go from here.

The alternative, assuming attempts to rescue indebted nations are not to be abandoned, is for the ECB to ignore the German Constitutional Court on the basis that the GCC has no jurisdiction over it, confront the Bundesbank, and accelerate its lending through the banking system, which of course is likely to eventually undermine the euro itself. The question then arises as to whether or not Germany will voice its objections to such a policy. It makes no sense for Germany, which has seen its own currency destroyed twice in the last ninety years and has experienced a period of national prosperity based on sound money before the creation of the euro, to be a party to the rapid expansion of money by the ECB.

This monetary expansion has to happen, however, if widespread sovereign defaults are to be averted. Its Constitutional Court has effectively made Germany’s decision. It can only with the greatest political difficulty raise more than €190bn from its own citizens to support debtors, and it cannot condone the monetisation of government debt. There is now only one alternative: Germany must leave the Eurozone and allow the member states, who happen to believe in the Keynesian salvation of a weak currency, to pursue their favoured solution with a weak euro. Germany’s politicians can now demonstrate that their hands are well and truly tied by their own constitution, which is getting in the way of co-ordinated solutions.

What does Germany get out of the euro?

Not as much as you would think. It is a common fallacy that Germany has benefited by anchoring its terms of trade with its neighbours through a common currency; this is an error born from neoclassical economic suppositions. Germany’s original supporters of Eurozone membership were its large industrial companies, which were looking forward to a trading environment made easier by a weaker currency. However, it was not long before these benefits were lost, because companies naturally felt less pressure to control their costs. The result is that German companies have (if anything) lost their competitive edge as a result of the single currency, and gains in productivity have been disappointing as a result.

The biggest losers have been the ordinary workers, whose wages continued to rise at a very pedestrian pace, if at all. Whereas in the past, a wage-packet bought more as the Deutsche mark rose in value against other paper currencies, that is no longer true. Instead, static wages have lost purchasing power over time, and the result is that growth in real disposable income per capita is virtually non-existent. Workers have been squeezed between a legacy of past wage-bargaining assumptions and a change from a strong to a weaker currency.


In short, it has become obvious to many people from all walks of life in Germany that the euro has done them no good, and, far from reaping benefits, they are actually less wealthy as a result of it. Therefore, the brash assumption fostered by the debtor nations that Germany can and will pay is simply incorrect, even if we stick to the headline numbers. But we all know that a government budget deficit is only the tip of an iceberg. For Spain and Italy, we must also consider rapidly escalating off-balance-sheet liabilities, the financial difficulties of local governments, and central government guarantees for nationalised and other supported industries. Government liabilities can be doubled or even tripled – who knows? Our experience of Greece’s troubles has confirmed that an initial few tens of billions, which Deo volente was enough, turned out to be only the first of a series of ever-increasing demands. If Greece is to be regarded as a learning experience, Spain will certainly be impossible to support, given that she shows no sign or even any prospect of economic recovery.

Germany’s politicians know this. For the moment they are frozen in a state of inaction, but there is a general election to concentrate their minds in about a year’s time. So irrespective of the timing imperative from Eurozone countries facing financial disaster, Germany is running out of time as well. It is make-your-mind-up-time for everyone.

If Germany is to abandon the euro, it has to do so as quickly and elegantly as possible. It must be able to demonstrate that it has no alternative and that it is the best solution for all parties involved. It must gain international support for its actions and the support of other key Eurozone members. There will also be legal difficulties to surmount – because, put simply, leaving the Eurozone is against the law.

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LawsofPhysics's picture

Several have been saying this for quite some time now.  Fiat is fiat is fiat, wake me when Germany leaves or some country, any country, has a monetary system/unit grounded in reality.

Ahmeexnal's picture

Gold Yuan, Gold Swiss Franc, Silver Drachma, Silver Amero.

LawsofPhysics's picture

so all the available physical coinage.  well, that is simply revolutionary.  I think most around here, knew this.

NotApplicable's picture

Well, if Germany leaving is the only "sensible" solution, that's the very reason it will never happen.

This is all about instilling collective discontent and guilt, AGAIN!

Divide and Conquer, FTMFW!

LawsofPhysics's picture

Yes, moreover, I actually inquired about being paid in gold yuan when negotiating another shipment of soybeans bound for China.  Funny how they got rather upset.  I wonder why?

falak pema's picture

so do I, its so easy to tungstenise their payments to you; as example has shown. Like their toothpaste.

The Yuan is pegged to the USD. The gloden yuan, would be pegged to Us tungsten-gold; probably made by the FED! 

Gold yuan, golden greek-dawn and golden tungsten-Fed, that is a nice allegory in goldfingered alliteration!


Tango in the Blight's picture

Can anyone explain to me why China keeps selling Gold Panda's when at the same time they are buying massive amounts of gold?

RSBriggs's picture

There's quite a bit of margin in the tungsten trade?

Ar-Pharazôn's picture

Gold Yuan or Tungsten Yuan?


would you trust a chinese businessman paying you in gold?


me, no...

insanelysane's picture

I was one of the ones that HAD been saying it for a while now.  It was the easiest solution.  I stress HAD been saying it because after watching the German political system work over the last 6 months it has become clear that all Western government officials have a vested interest in keeping the status quo.  I, along with many ZH readers, have made the mistake of not considering how strong this political will is.  Politicians will never make a difficult decision until there is no choice but to make that decision.  It only ends when the market stops playing the game or the market is unable to play the game.


At some point, with governments borrowing 20 to 50% of every thing they spend, the world runs out of borrowable money.  Banksters will ctrl-P but the appetitie of the beasts will always be greater.

max2205's picture

Build that damn wall, and give those other countries back to ussr where they belong. How fucking implement is that. End the Gorbachive curse right now


disabledvet's picture

Spot on. German banks and insurance wins with a strong euro via repatriation (then they buy gold)....but German industry wins when the euro weakens or goes kaput. Security problems are the problem. Germany herself has no issues that I am aware of...but the periphery has been so obliterated and Germany herself will not intervene (indeed they do seem to me be the exact opposite of the solution) only "an other sovereign" can do that. That's France, England, Spain and Sweden.

westboundnup's picture

Is it just me, or is the Dow diving for cover?

RSloane's picture

Right now yes. Wait until 3:00, the WS witching hour.

bankonthebust's picture

Germany wont be allowed to leave.


Popo's picture

If only they were still sovereign.  

jal's picture

You mean that the bankers will not allow them to hand in their keys, cut their losses and walk away from an underwater mortgage!!!

RSloane's picture

For some reason, I read that twice as underwear mortgage.

ParkAveFlasher's picture

<<< Germany exits before Greece flakes off

<<< Greece flakes off before Germany exits


rvremi's picture

The real question is how do you quit the euro-zone ? All the rest is non-sense.

Imagine the Kansas want to quit the USA... The question is not is it right or not. The question how do you do that.

So, stop talking about the exit of such or such country from the euro-zone. It's just non-sense. The euro-zone will collapse all or not. Like the USA and the China and the Japon.

LULZBank's picture

Agree on Jap-on, they cant Jap it off.

insanelysane's picture

You allow German citizens a week or two to exchange their Euros for NDM (new deutshe marks) with some limit per person.  All German bank accounts are automatically switched over.  Done.

rvremi's picture

And all the europeen companies will pay with which devise ? And all the contract between different countries, they will used which devise, with VAT ? What will be the process to export/import ? How will be modified the VAT exchange with the country ? How will the central banck exchange mechanism ? Will we restaure the frontier with the country ? Etc, etc...

Non Passaran's picture

WTF are you talking about, what frontier? You are so clueless, you even don't know that a country can be in the EU but outside of eurozone.
Funny guy.

kaiserhoff's picture

If Frau Merkel would just auction her soiled panties on e-bay, they would have plenty of money.

Hell's the problem?

WALLST8MY8BALL's picture

Germany was having trouble

What a sad, sad story

Needed a new leader to restore Its former glory

Where, oh, where was she? Where could that woman be?

We looked around and then we found

The lady for you and me And now it's...

Weimar Time for Merkel and Germany

Deutschlander’s happily obey?

We're printing to a faster pace

prices rising faster in this place

Weimar Time for Merkel and Germany

Rhineland's a cold land once more!

Weimar Time for Merkel and Germany

Watch out, Europe We're going for QE4!

Weimar Time for Merkel and Germany

Cult_of_Reason's picture

German referendum und exit from the EU is inevitable, just a matter of time.

ThirdWorldDude's picture

~999~  Germany is not Switzerland!

Aegelis's picture

I thought The New World Order needs one economy to rule them all.  Looks like a few more years then before the mandatory chip implant in the hand or forehead.

Urban Redneck's picture

A single currency destroys the single greatest arbitrage opportunity for the ALL the oligarchs...

dwayne elizando's picture

Arbitrage would still exist in a world currency system.

LULZBank's picture


Whereas in the past, a wage-packet bought more as the Deutsche mark rose in value against other paper currencies,

So what was good for Germany in the past is not good for Swiss francs now?

Do we want a strong currency or a weak currency?

I am getting so confused now.

Dr. Engali's picture

Germany is not going to leave the Euro...period. They are too easy to demonize and all the chaos would be blamed on them. Germany will continue down the road to perdition withh all the other Euro countries , just as the U.S will with all 57 of her states.

TIMBEEER's picture

Bingo! Exactly. Germany will not leave until the Euro breaks. Hopefully soon, however.

Temporalist's picture

I don't agree as they are in a catch 22, damned if they do and damned if they don't.  They are the parents to teenagers who hate them beacause they won't raise their allowance even as the parent goes broke.  Either way the child will hate them because if the parent leaves the kid is scarred for life, feels poor and abandonded and if the parent stays the kid grows into a helpless indebted adult that still hates the parent for not caring and giving more.


If they are going to be hated anyway why stay and have to put up with all the nonsense?

rvremi's picture

Nobody will leave the euro-zone... It's 5 years to enter and minimum 5 years to exit. All the contracts are to be rewriten, all the treaties are to be change...

JustObserving's picture

Why would the Netherlands, Finland stay in the Euro after Germany leaves?  They will be stuck with the debts of southern Europe. After they leave, why would France stay?  They do not want the debt either.  

It will be a complete collapse since no country wants the debt that benefits others.  Would Italy subsidize Greece's debt?  Of course, not.  So it will be every country for itself after Germany leaves.

Tango in the Blight's picture

The Netherlands will probably stay in the Euro till the very end because the Dutch sheeple voted in the two biggest Europhile parties and it looks they are going to form a cabinet very soon. Dutch sheep are going to get fleeced to the bone soon.

Joe A's picture

Yes, the Dutch voters are sheep but the elections in the Netherlands were not about Europe. They were about the economy and the division of wealth within the country. Roughly one part voted for the Liberals while the other part voted for the Socialists. Ironically, while these two are opposites in ideology, they will likely form a new government. For the sake of political stability (NL had 5 elections in the last 10 years) they will make compromises. Nevertheless, you are right in saying that these two parties are europhile but if Germany were to leave the Euro, NL would follow suite since Germany is NL's biggest trading partner.

Tompooz's picture

"Germany were to leave the Euro, NL would follow suite since Germany is NL's biggest trading partner."

Too right. Not only would they follow suit, they would stick to a common currency, together with Finland and Austria. That "core euro" with its institutions will be the one that survives. It may also become competition for the world's current reserve currency.

insanelysane's picture

Once the Northern countries leave, the Southern countries can devalue the Euro (ctrl-P^2) and pay off their debts.

Sandmann's picture

Germany and France are centre-stage; in the post-war years they were partners in forming an economic and political block


Fantasy. Germany was disarmed under SHAEF and only re-armed in 1957 because the USA needed German manpower to defend Western Europe. France objected so The Treaty of Rome was used as a quid pro quo to tie Germany down under French control. Gemany was locked into NATO and forced to buy US aircraft like Starfighter and Phantom. MI6 and CIA funded the European Movement to create a counterbalance to Stalin's hegemony of Central Europe. 

Germany was a country without sovereignty, without Constitution, without a convertible currency, without Armed Forces, and with Sections 53 and 107 of the UN Charter even today defining Germany (and Japan) as "enemy states" 


Germany did what the USA demanded just as the GDR did what the USSR demanded

shovelhead's picture

The zombies are coming...

RUN! Germany,


Madcow's picture

there's still a little time to lure folks into buying the bad debt before a rabid outbreak of honesty and transparency 

Sandmann's picture

after the Franco-Prussian War and the First and Second World Wars, Germany lost all appetite for belligerence anyway.


Franco-Prussian War  = France attacked Prussia

WW1  - British Empire declared War on Germany having allied itself to Russia for the first time in history

WW2 -  Britain went to war to save Josef Stalin and gave him Poland as a gift and half of Germany.


tuttisaluti's picture

This is just wishful thinking from a few US and UK banker. coplete nonsense in my view.

TIMBEEER's picture

yes, the UK + US banks and the German, Dutch and Finnish people are hoping for this nonsense to end.

Of course, tutti bunga bunga wants to continue the disaster..

Portugal's picture

Germany leaving the Eurozone is a subject only for someone completely stupid or someone completely detached from reality. Would that same person consider California leaving the USA? No. Nebraska perhaps? No. Off-Course Not.

Don’t be such an ass…