August 18, 2011
Euroland
“Whenever destroyers appear among men, they start by destroying money, for money is men’s protection, and the base of a moral existence.”
–Ayn Rand
Forced Sanity (At Least for the Time Being) in Paris
An interesting thing happened in Paris on August 16. Sanity, potentially temporary, and in our opinion imposed largely by German voters and political factions — prevailed. After an emergency meeting, Chancellor Angela Merkel of Germany and French President Nicolas Sarkozy of France announced there would, at least for now, be no issuance of Euro Bonds.[1] No substitution of 17 government bonds with a single Euro Bond.[2] No allowing of weaker economies to borrow as they say “in cooperation” with the most powerful and solvent economies Europe — Germany and France.[3]
Specifically, the two leaders said they did not want to increase the size of the EU’s 440 billion ($633 billion) euro rescue fund.[4] An operation which might need to take over a massive, multibillion euro European Central Bank program to prop up (in our opinion artificially and with money printed out of thin air) the prices of Spanish and Italian bonds by buying them on the open market.[5] The ECB spent 22 billion euros ($32 billion) in the first week of the program alone and says it desires to hand off that responsibility in the near future to the rescue fund, or European Financial Stability Facility.[6]
Merkel and Sarkozy also proposed resubmitting a financial-transaction tax, that debt limits be written into national law, and the creation of a “euro council” to assist economic governance of Europe.[7]
As we see it (at least for now), and to put it plainly — Germany, and to a lesser degree France are not going to bail out the fiscally poorly run economies of Spain, Italy, Greece, Ireland, and Portugal. Not if Chancellor Merkel and President Sarkozy want to keep their jobs.
Equity markets immediately plummeted, showing to us again how dependent they (and economies) are on government stimulus/money printing.
Now who’s going to buy all that shaky debt from the failing PIIGS (Potugal, Italy, Ireland, Greece, and Spain)? Perhaps the Fed or the International Monetary Fund?
We can’t think of anyone other than a central bank.
Our View
Billionaire George Soros writes, “Only Germany can reverse the dynamic of European disintegration…”[8] We ask, “Why should they?” And “Where would be the lesson in that?” It’s our opinion the way to cure fiscally irresponsible behavior is not to reward it. And German voters are in no mood to do so.
The official version of the reasoning behind European economic union has been the facilitation of trade, economic growth, etc. However, as we watch the entire Euro-debacle unfold another thought occurs to us. Listening to constant talk of “bailing out” or “saving” the PIIGS countries – it occurs to us the real “bailing out” being discussed is that of the banks (predominantly and more sypathetically referred to as “investors”) who made risky loans to countries who have proven themselves historically to be more akin to economic children.
We believe these banks would not have made such loans to countries with less than stellar historic credit-worthiness unless they felt there would be a European monetary backing if the loans went bad.
Effectively, despite all the rhetoric, as we look at the history of central banks in general, and watch them in action – we see a prevailing pattern of the bailing out of governments and private banks which make bad decisions. In other words, we see a tendency of big banks privatizing their gains and socializing their risk via bailouts (with taxpayers footing the bill through government/central bank money printing/currency debasement).
We liked what we saw in Paris – so far. It’s time for the banks to live with the consequences of their risky decisions. Why should savers be forced to watch their national currency be debased instead?
It will be interesting to see how this all continues to unfold.
For some reason, we still smell a bailout. And we plan accordingly…
While there is a lot of tough reality going on out there – we maintain our positive outlook. That outlook is based on our belief that a bear market in one thing is often a bull market in another.
As we enter this critical time – now, more than ever – we believe investors need to focus on their investment strategies. Those readers who are clients are fully aware of the strategies we’re implementing in light of unfolding economic circumstances. Others may feel free to contact us to learn more.
Sincerely,
Stephan R. Ernharth, JD
Vice President
Ernharth Group
www.ernharth.com
Go to www.ernharth.com/economic-commentaries to read past articles from our Economic Commentary series.
[1] Associated Press, “Merkel, Sarkozy Propose Eurozone Government” August 16, 2011[2] Ibid[3] Ibid[4] Ibid[5] Ibid[6] Ibid[7] Bloomberg, “Merkel, Sarkozy to Shun Euro Bonds” August 16, 2011
[8] Telegraph.com.uk, “ECB is Euroland’s Last Hope as Bail-Out Machinery Fails to Resolve Crisis” August 14, 2011
