The Euro’s Death Knell Could Come As Early As September 2011

The primary issue for Europe has been, is, and will be Germany. True, the ECB is the alleged central bank for Europe, but without Germany’s support, the ECB is simply a monetary figurehead representing bankrupt European nations.


The reason for this is because Germany is the largest, strongest, most solvent economy in Europe. And Europe is not the US.


In the US, most people call themselves “Americans.” Even those individuals who like to refer to themselves by ethnicity, the word “American” remains part of their self-description e.g. African Americans, Latin Americans, Native Americans.


This mentality creates a cohesion in the US that does not exist in Europe. While New Yorkers may not especially like Americans from California, they still consider California an important part of the US and a place that is ultimately part of their “home” country.


In contrast, the European Union is the union of 17 separate countries most of which speak different languages, have entirely different cultures, and long-standing histories with their neighbors that usually involve multiple wars.


In simple terms, the people in European countries take pride in their individual countries, NOT in the EU. In fact, they only bought into the notion of the EU because of the alleged economic benefits it was meant to bring them.


Now that the economic benefits of the Euro are falling to pieces, these underlying tensions are coming out. Consider France and Germany, the two largest economies in Europe (and neighbors). France, a country with strong socialist tendencies is extremely supportive of the Euro (67% want to keep it). In contrast, Germany, which eschews loose money policy in general, wants out (only 30% of Germans want to keep the Euro).


And as diverse as Europe is, it is Germany that will decide the Euro’s fate. Without Germany’s backing, the ECB has no clout for the simple fact that it’s nothing more than a Central Bank, un-backed even by a particular country.


Put another way, someone actually has to foot the bill for the ECB’s moves. As the largest most solvent economy in Europe, that someone is Germany. Which is why rather than looking at the ECB’s moves, we need to consider the German political climate today.


Consider the following:


§  86% of Germans think the Euro is at risk.

§  71% of Germans are doubtful about the common currency.

§  56% of Germans say the Euro has brought them economic disadvantages.


These statistics are having a major political impact on German political elections. To whit, current German Chancellor Angela Merkel’s political party took a serious thrashing in the March 2011 regional elections. The results made it clear that Merkel’s pro-nuclear energy and pro-bailout stances have cost her and her party dearly.


On top of this, it’s now clear that the German economy may once again be rolling over. German manufacturing and services data both cooled falling to Mid-2009 levels this month. As leading indicators, these two items imply a much weaker German GDP is coming fast.


Two key surveys of German financial analysts and executives (the ZEW Economic Sentiment and IFO Business Climate, respectively) fell as well indicating that business leaders are concerned about an economic slowdown as well.


So here we have the majority of Germans concerned about the Euro or wanting out of it at a time when the German economy is starting to roll over again and another round of German political elections coming in September.


This is a perfect recipe for another political upset with Angela Merkel and her party losing badly. Remember, politics is all that matters in Europe (not economics). So if it becomes political suicide to back the Euro in Germany even the staunchest supporters of the currency will withdraw support of it. When this happens then the EU and the Euro will collapse soon after.


I fully believe this will prove to be the case this coming Autumn. However, the likelihood of the EU collapsing before then is relatively small due to the seasonal impact of European politics..


In simple terms, no major political decisions are made in Europe during the Summer months. Summertime marks a time of “perceived” economic improvement on the continent with many of the tourism-heavy economies (Spain, Portugal, Greece, Italy) seeing an uptick in economic activity.


So Europe will be “kicking the can” as much as possibly until September. However, at that point the real fireworks could begin. And they could easily make 2008 look like a picnic.


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