The battle fronts have been drawn out: it is literally the world against Germany.
What is happening in Europe is nothing short of a full-out onslaught to have Germany, which conventional wisdom says benefited from a decade of importing peripheral European prosperity (although conventional wisdom says little about whether the same Peripheral countries had a gun against their head when accepting the Euro or importing German goods, hence keeping German economy buoyant as everyone else was sinking under untenable current account deficits), repay the favor and literally hand out cash to Greece and now all the other insolvent European countries in order to preserve the European dream. So far so good - and if it was a modest and contained amount, we are confident Germany would have agreed [9].
However, as Zero Hedge first calculated last July, sticking Germany, and technically a few German states (we can't wait for calls for a return to a West-East German split at some point in the future, because economic prosperity is certainly not uniform across Germany itself), with the bill would result in a collapse of the German paymaster (which as a reminder, already funds a stealthy European bailout to the tune of EUR2 billion/day via TARGET2). Still, none of the matters to EU President Herman Van Rompuy, European Commission President Jose Manuel Barroso, Euro Group President Jean-Claude Juncker and European Central Bank President Mario Draghi, all of whom, Spiegel reports, will hand over a new proposal to Merkel, this time for a Eurobond Lite project. And with Obama's reelection chances on the line should Europe implode one can bet the US president will make his opinion quite clear too.
From Spiegel, google translated [10]:
Euro-bonds are not only for the German government, a red cloth. But at the same time all participants are aware that without the guarantee must be kept of the rich EU partners, the interest on the loan crisis states barely in check. Feverishly looking for the elite of the EU, therefore, after a compromise solution. According to SPIEGEL information they rely on so-called Euro-bills - a common European bonds with short maturities and a limited amount.
EU President Herman Van Rompuy, European Commission President Jose Manuel Barroso, Euro Group President Jean-Claude Juncker and European Central Bank President Mario Draghi want the end of next week to present the leaders with a proposal. According to the plans of each State may fund up to a certain percentage of its economic output by €-bills. Those who do not comply with the rules will be banned from trading in the following year with the papers.
The quartet hopes to convince the model, the federal government. While France calls for common European bonds, Germany rejects the Euro-bonds from now. In Brussels, however, is convinced that now the model is outlined with the German constitution in line, because the common bonds in the amount and duration are limited.
Which again brings us to the fundamental tradeoff for Germany. On one hand:
Another way, however, seems hardly conceivable that also believe the financial experts of the Institute for World Economics (IfW) in Kiel. They quantify the financial risk for Germany in the collapse of the euro zone to SPIEGEL information on some 1.5 trillion euros.
Yet on the other, Germany will continue to be locked up with ever more contingent liabilities whose ultimate losses will be far greater the longer the illusion continues. Remember: Deus Ex Machinae exist only in ancient Greek theater.
All of this was summarized previously by Carmel Asset Management in their presentation [11] which we posted two weeks ago, and which correctly calculated that the loss from a European collapse now is greater than keeping the Euro together... but what about in 1 year...or 5 years...or 10 years, with the ECB funding peripheral current accounts to the tune of almost EUR100 billion in sunk costs each month and rising?
After all this is the pure definition of unsustainability.
The definition of a lose-lose situation.
[12]
Going back to the fundamental dilemma for Europe [13], those across the table from Merkel will continue to propose piecemeal solutions which will not work, something the market will make increasingly clear. Alternatively, Germany, which has all the trump cards, will merely wait for Europe to wither away until it has no leverage, at which point it will be willing to provide a DIP loan on whatever terms it decides on. If that means a true European Federalist state headed by Germany, so be it.
Just like a true vulture investor literally rolling-up the world one broke country at a time.
And to think all of this could have been avoided if people had actually listened to Milton Friedman, who once again got things right about 15 years of everyone else [14]:
The drive for the Euro has been motivated by politics not economics. The aim has been to link Germany and France so closely as to make a future European war impossible, and to set the stage for a federal United States of Europe. I believe that adoption of the Euro would have the opposite effect. It would exacerbate political tensions by converting divergent shocks that could have been readily accommodated by exchange rate changes into divisive political issues. Political unity can pave the way for monetary unity. Monetary unity imposed under unfavorable conditions will prove a barrier to the achievement of political unity.