Via Mark J. Grant, author of Out of the Box,
Germany: Backed Into the Corner
Several recent releases of data bring the problem into focus; a sharp focus. With Ms. Merkel in China trying to buoy the European position China announced that exports to the European Union declined 16.2% in July with sales to Italy falling off the cliff; down 35.8%. These are not small variations or figures just slightly off the consensus opinion but disastrous numbers that clearly indicate the deepening recession that is taking place on the Continent and there will be quite serious consequences that come from a fall-off of this magnitude.
This morning the Consumer Sentiment numbers were released for Europe and the number was 86.1 down from 87.9 in July and far worse than the median forecast of 87.5 and the worst number, in fact, since August 2009. In Germany, once thought to be almost invincible and somehow outside the recession that is raging in Europe, the crisis is just beginning but it has commenced and it is clearly indicated by the newest data which shows that Germany has begun the descent down the rabbit hole with the rest of its brethren. Unemployment increased in Germany, which was reported out this morning, to 2.9mm people and it was a greater drop than had been forecast. German capital investment fell 0.9% in the second quarter, factory orders were down 7.8% from a year earlier, business confidence fell for the fourth straight month and growth slowed to 0.3% as all of the EU-17 reported a -0.2 contraction.
Europe, economically, is in serious trouble and as the situation worsens the tide has run out for Germany. This is an early call and not one for any hedge fund to trade on as I am looking further down the road but as Greece, Portugal, Ireland and Spain have demonstrated; the day of the Jackal is coming. We now find a Europe that is as divided as the American elections. We have a bi-polar condition where France, Greece, Italy, Ireland, Spain, Portugal, a slew of smaller countries and even the ECB are sitting in one corner of the boxing ring and where Germany is virtually alone in the other with perhaps Austria handing Germany the wet towels. I would assert that Germany is now trapped and that she has lost control of situation first by the way the game has been played and second by the limitations of her capital. A careful examination is called for and an explanation made.
The rhetoric has been the same; an irreversible Euro, an irreversible European Union, an independent ECB and a greater good for each and every country in Europe. This has been the glittering neon sign since 1999 and it flashed a kind of reality up until the time when the electricity began to sputter and certain parts of the sign went dark. Now with so much of the sign black, repairs are not only called for but demanded by the countries no longer in prosperity but in decline. During all of this time Germany waved the flag along with everyone else but when the crisis began in earnest Germany chose to still wave the flag and to staunch the flow of blood by demanding austerity, greater fiscal control and consequences for the use of their money. This ploy worked for a while until the recession deepened, the politics as a consequence in many nations began to get ugly due to the various cut-backs in social and civil programs and the troubled nations in Europe began to line-up to demand what had been promised; an economically united Europe in both good times and bad. Consequently we now stare at a reality where Germany is backed into a corner which will either result in Berlin being forced to say “No” or refuse to fund or leave the EU or allowing herself to be dragged down to the same cost of funding and the same standard of living as some median for the entire Continent. Greece, Spain, Italy and the use of funds by the ECB are going to force Germany to make some very tough decisions where local politics will dictate the choices and none of the possibilities, not one, bode well for Germany or the German people.
Sometimes when I hear various people speak about the ECB I am amazed by their viewpoint. The ECB is not some alien nation found in another universe. The central bank is owned by the central banks of the nations in Europe and they are accountable for her profits or losses with Germany being accountable for about 22% of the balance sheet. There seems to be a certain fantasy in the markets that the ECB can do this or that without consequences, without losses and without anyone being accountable. Where this fairy godmother viewpoint comes from I don’t know but it is without doubt a fantasy with no basis in the real world. I can assure you that the ECB is now full of so many foul smelling securitizations, of so many loans that have soured and of so much collateral that has an actual worth of perhaps the paper upon which it is written that the stench will eventually fill the nostrils of the ratings agencies and an ever widening group of investors that are choosing to steer clear of Europe. The ECB is one flash point of the European dialogue because troubled Europe is demanding that its resources be used to not just bail them out but continue their standard of living and lower their cost of funding but there is a consequence to this and the Germans know it which is that it is a disguised kind of Eurobonds where a monetary transference takes place with the ECB as the conduit. This is important to understand so I repeat; the poorer nations are demanding that the ECB buy their debt and lower their cost of funding so that the ECB becomes the vehicle for a transfer of wealth from Germany to the rest of Europe.
Besides the ever growing rift at the ECB you have three consequential nations demanding Germany’s money which are Greece, Spain and Italy, in the not too distant background, which is why Italy has sided with the troubled countries and then you have France, where I wonder if she is not going to propose some scheme soon to benefit her finances. Greece wants the next tranche of $50 billion and then she will ask for more and then Spain is playing the game of charades where she contends it is just her banks and with $22.5 billion pegged for her regional debt and pleas coming shortly that will be more than 100% larger, I estimate, Spain is trying to do everything possible not to engage the Troika and an actual examination of her devious financial position so as to avoid any kind of peek at reality which would drive Spain, in my opinion, over the cliff. Then Italy, utilizing the most recent data available, is contracting more than any other significant nation in Europe so that her turn in the begging line is coming soon.
Make no mistake; Germany is now in the corner, will have to make some very difficult decisions and she is trapped beneath the banner which she has long waved. The German economy is only $3.55 trillion and she is being asked, in fact demanded, to turn over her capital to support the rest of Europe which will cause a serious decline in her own finances if she undertakes the task. I can smell the air; I think you will soon find a politician in Germany who is opposed to the policies of Ms. Merkel and who will rise to power based upon “Germany for the Germans” just as Austria has now stated that no more of their money is going to be used to bail-out other countries and that Austria has reached her limit.
All of this is also defined by a very warped time-line. The problems are now, the recession is now, the economic difficulties are now and the solutions that have been proposed are one to three years out. The markets tend to get confused here but there is a huge divergence between the seriousness of the problems residing in the “present” and the proffered answers perhaps found in the “future” which would take years to accomplish if accomplished at all. I point specifically to a change in the European treaties, or a change in the structure of the ECB, or any new scheme for monetary transference, or some kind of central oversight of all of the European banks or a central fiscal authority for all of Europe or any number of other plans that have been trotted out in hopes that they might stick or mollify the markets. The solutions are years out; the crisis is now and this is one of the central problems of this unfolding drama.
Germany is in the box and I am afraid that is now Frau Pandora and not Frau Merkel who owns the key.