EU Pulls Out Nuclear Option: Proposed 500 Billion Euro Bail Out Package Is Largest In History

From Le Monde:

Zone euro: l'Allemagne propose un plan d'aide de 500 milliards d'euros

AFP | 09.05.10 | 21h58
L'Allemagne a proposé dimanche soir la mise sur pied d'un vaste plan d'aide financier pouvant être utilisé pour les pays de la zone euro, d'un montant total de 500 milliards d'euros et impliquant le FMI, a indiqué à l'AFP une source diplomatique européenne. "L'Allemagne a mis sur la table une proposition totale de 500 milliards d'euros", a-t-elle indiqué. Elle comprendrait les 60 milliards d'euros de prêts octroyés par la Commission européenne, dont il était question ces derniers jours, ainsi que 440 milliards qu'apporteraient si nécessaire les pays de la zone euro et le Fonds monétaire international. Cette dernière enveloppe serait constituée "de prêts bilatéraux, de garanties pour des emprunts et de lignes de crédit du FMI", selon la même source. Il s'agirait par son ampleur, s'il fait l'objet d'un accord, d'un plan d'aide sans précédent dans l'histoire.

Translated:

Germany proposed on Sunday evening the establishment of a comprehensive plan of financial aid can be used for countries in the euro area, totaling 500 billion euros and involves the IMF, told AFP European diplomatic source. "Germany has put on the table a proposal of 500 billion euros," she said. It would include 60 billion euros in loans from the European Commission, he was in the last day, and 440 billion would accrue if necessary, the euro zone countries and the International Monetary Fund. This envelope would be established "bilateral loans, collateral for loans and lines of credit from the IMF," the source said. It would be in scale, if the subject of an agreement, an assistance plan is unprecedented in history.

And once this money is exhausted which it will be, Europe will default as the playbook is TARP then immediate monetization, however without a reserve currency backstop. The EURUSD is spiking by 3 handles right now, however once traders realize that the ECB will commence printing money in earnest it will go straight down to parity.

For those who want to read the best perspective on the nuclear option, here is Evans-Pritchard's take on why this nuclear bomb will be a dud:

The EU is invoking the "exceptional circumstances" clause of Article 122 of the Lisbon Treaty, arguing that the euro is subject to an "organized worldwide attack". This is a legal minefield. A group of professors has already filed a case at Germany's Constitutional Court, claiming that the Greek bail-out is illegal and that the EMU is degenerating into a zone of monetary disorder.

The judges have denied an immediate injunction on aid to Greece, saying that it would to be too "dangerous" to take such a step on limited facts, but it has not yet decided whether to hear the case. The battle has escalated in any case. The new EU rescue mechanism is to be permanent and no longer just bilateral help, if Mr Sarkozy is right. The professors have been given an open goal. One almost suspects that the Kanzleramt in Berlin is so weary of this dispute that it has given up worrying about lawsuits. If the judges block an EU debt union, be it on their heads.

Nor is this rescue fund any more than chemotherapy for the cancer eating away at the foundations of monetary union. It is not a cure. The rot set it when the South joined EMU before it was ready to cope with ultra-low interest rates or match German wage-bargaining. The ECB made matters worse by gunning M3 at an 11pc rate during the bubble. Club Med lurched from credit boom to bust. It is now trapped in debt deflation at an over-valued exchange rate, like Argentina with its dollar peg in 2001 until air force helicopters rescued President De La Rua from the roof of the Rosada.

The answer to this -- if the objective is to save EMU -- is for Germany to boost its growth and tolerate higher `relative' inflation. This would allow the South to close the gap without tipping into a 1930s Fisherite death spiral. Yet Europe will have none of it. The weekend deal demands yet more belt-tightening from the South. Portugal is to shelve its public works projects. Spain has pledged further cuts. As for Germany, it is preparing fiscal tightening to comply with the new balanced budget amendment in its Grundgesetz.

While each component makes sense in its own narrow terms, the EU policy as a whole is madness for a currency union. Stephen Lewis from Monument Securities says Europe's leaders have forgotten the lesson of the "Gold Bloc" in the second phase of the Great Depression, when a reactionary and over-proud Continent ground itself into slump by clinging to deflationary totemism long after the circumstances had rendered this policy suicidal. We all know how it ended.

h/t Nico