As long time readers know, a central theme to my analysis regarding Europe is that politics, not economics, rule Europe. What I mean by this is that most major decisions in Europe are determined by political agendas that ignore economic and financial realities.
This is at the core of the “welfare state” mentality that permeates Europe as a whole. The EU in general is comprised of an aging population that is more concerned about receiving the pensions/ health benefits/ social payouts that were promised to them by the system than anything else.
As a result of this, EU voters, who determine EU elections, don’t take action until what has promised to them comes under threat.
For this reason, EU political leaders will maintain their agendas regardless of whether said agendas go against financial or economic realities (or common sense for that matter) until these agendas begin to have real negative consequences for their political careers.
With that in mind, we must consider that Germany’s decision to prop up the Euro is finally beginning to arouse furor from the German population. In particular, the below story which reveals that Germany has in fact put German taxpayers on the hook for over €2 trillion in back-door EU rescue measures could be the proverbial tipping point that sends German voters over the edge.
German tempers boil over back-door euro rescues
Professor Hans-Werner Sinn, head of Germany's IFO Institute, said German taxpayers are facing a dangerous rise in credit risk from a plethora of bail-out schemes. "The euro-system is near explosion," he told Austria's Economics Academy on Thursday.
Dr Sinn said Germany is on the hook for much of the €2.1 trillion (£1.72 trillion) in rescue measures for EMU debtors - often by the back-door - that will saddle Germans with ruinous losses one day.
"It is a horror scenario," he said, warning that the euro system is splitting friendly countries into blocs of mutually hostile creditors and debtors, exactly the opposite of what was hoped.
Earlier this week, the Foundation for Family Business in Munich filed a criminal lawsuit against the Bundesbank, accusing the board of disguising the true scale of risk born by German citizens.
This is the last thing Angela Merkel needs right now. She’s already about to lose her primary ally in pushing for fiscal reform in the EU (Nicolas Sarkozy will very likely lose the second round of the French elections).
For her to now appear to be a complete hypocrite who talked of austerity in public while the Bundesbank was secretly signing Germany up for more and more EU debt behind the scenes could quickly become a MAJOR issue in German politics.
Remember, Merkel has been riding a wave of popularity not seen since her re-election in 2009 courtesy of her decision to play hardball with Greece and the other PIIGS: her agenda there was to offer bailout funds under fiscal requirements that were so onerous that it made it highly unlikely the troubled PIIGS would go for them.
So for Merkel to appear two-faced concerning Germany’s involvement in the EU bailouts could have dire political consequences for her career (next year will be a federal election year for Germany).
So what’s next? Merkel’s reputation as a hardliner for fiscal reform just went out the window… she’s about to lose her #1 ally in pushing for fiscal austerity in Europe (Nicolas Sarkozy)… and all of this is happening while inflation is rising in Germany and Germans are openly outraged regarding the EU bailouts.
In simple terms, Angela Merkel is now at the point at which she is facing potentially very serious political consequences for her policies. Which prompts the question… is it be time for her to start floating Germany’s “Plan B” (leaving the Euro)?
Remember, in the last six months Germany has:
- Passed legislation that would permit Germany to leave the Euro but remain a part of the EU
- Reinstated its Special Financial Market Stabilization Funds, (or SoFFin for short)
It is the second of these items (the reinstatement of the SoFFIN) that the western media and 99% of investors have missed entirely. In short, Germany has given the SoFFIN:
- €400 billion to be used as guarantees for German banks.
- €80 billion to be used for the recapitalization of German banks
- Legislation that would permit German banks to dump their euro-zone government bonds if needed.
That is correct. Any German bank, if it so chooses, will have the option to dump its EU sovereign bonds into the SoFFIN during a Crisis. So in simple terms, Germany has put a €480 billion firewall around its banks thereby allowing Germany to potentially pull out of the Euro if it has to.
Now, I’m not suggesting that Merkel will suddenly opt to do pull Germany out of the Euro. Doing that would only worsen EU relationship and arouse more anti-German sentiment.
However, I wouldn’t be surprised to see Merkel start threatening this in the coming weeks as German outrage grows regarding their exposure to back-door EU bailouts. Remember, her political popularity is largely due to her appearing tough on the PIIGS. She has to regain that appearance as quickly as possible in order not to face serious political consequences.
On that note, I fully believe the EU in its current form is in its final chapters. Whether it’s through Spain imploding or Germany ultimately pulling out of the Euro, we’ve now reached the point of no return: the problems facing the EU (Spain and Italy) are too large to be bailed out. There simply aren’t any funds or entities large enough to handle these issues.
So if you’re not already taking steps to prepare for the coming collapse, you need to do so now. I recently published a report showing investors how to prepare for this. It’s called How to Play the Collapse of the European Banking System and it explains exactly how the coming Crisis will unfold as well as which investment (both direct and backdoor) you can make to profit from it.
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