Let’s start with a few facts:
– Did you know that the German Chancellor, Angela Merkel is due to have a general election by October 2013 at the latest?
– Did you know that her party is in a coalition with 2 other parties?
– Did you know that most of the German people have not had a pay rise for over 10 years?
– Did you know that Germany is printing and minting Deutschmarks?
I believe that the Eurozone economic crisis revolves around these facts.
Germany is the one country in the European Monetary Union that, apparently, has enough money to solve the Eurozone crisis and, when Mrs. Merkel, Germany’s Chancellor, goes to her country and asks to get re-elected, she will want to be seen to have been tough with the Southern countries who, in the German man-on-the-streets view has squandered the cheap loans that have been given to him mainly by Germany.
She cannot have been seen as a soft touch come election time and I believe that this is seen by the other countries’ politicians as her problem and they need to be seen to put as much pressure on her as possible, including the very real prospect of a break-up of the European Union (or European Experiment, for that is what it is) before she can be seen to save face and be able to say to her people, “I couldn’t do anything else but bail them out or the Eurozone would have collapsed and Germany would have seen nothing for all its sacrifices over the past 10 to 15 years.”
The consequences of the above will be that until the next German elections, Europe will lurch from one crisis to another with successive countries being bailed out after agreeing to severe austerity rules with more and more of Germany’s reserves being spent or earmarked to cover loans.
In other words, Mrs. Merkel will be dragged kicking and screaming along the path of “I am being forced to give in”.
The good news in all this is that most of the financial professionals have worked this out and see that not only is there a light at the end of the tunnel but that the result will most likely be one thing. The European Union will continue for the foreseeable future (probably about 10 to 15 years) and during that time those countries that remain in the union will become leaner and meaner. Once they are lean and mean they will represent a future problem to German politicians since they will have correspondingly stronger reasons for taking decisions in Europe.
There is little doubt that, in order for the European Experiment to succeed, all of the countries involved will have to become one large country and give up their sovereignty forever.
Given the immense problems that some countries have had with each other over the past 100 or so years and the ingrained reluctance to give up individual sovereignty, it could be a very long time before this can be accomplished.
It is sad to say that Hitler tried his own experiment in the 1940’s and, whether we like it or not, a Europe with a dominant Germany would probably not be tolerated by most citizens of the countries involved in his activities.
But hang on a minute Keith I hear you say, what about the final fact, the printing Deutschmark thing?
Well this is the one aspect that, whilst it is unlikely to happen, could do if Mrs. Merkel cannot persuade the German people to carry on with the European Union and another party leader convinces them that leaving the Euro as a rich nation and going it alone is their best bet.
Investment veteran George Soros has issued a plea to the German government to lead the Eurozone out of recession by boosting growth, creating a joint fiscal authority and guaranteeing common bonds, or itself leave the currency to safeguard its future.
“Lead or leave: this is a legitimate decision for Germany to make,” the billionaire financier and philanthropist said in an interview with the Financial Times.
“Either throw in your fate with the rest of Europe (and) take the risk of sinking or swimming together, or leave the euro; because if you have left, the problems of the Eurozone would get better.”
It’s apparently unlikely but if it did then the requirement for the Mark to be available would be paramount.
There are economists and others who are far more in tune with what is going on than me who are examining every possible way the problem could have a result and these people are keeping unit trust fund managers and other investors such as pension fund managers abreast of their findings and fine tuning their predictions every day.
We analyse our own model portfolios regularly and we are seeing a gradual reduction in the involvement of European companies. Managers are seeing better value without the potential downsides elsewhere in the World. There is a link at the bottom of this piece to our funds.
In the end, whatever the eventuality, most professional investors are gradually moving away from investing into Europe and, companies that are reliant upon trading with Europe are finding new trading partners elsewhere in the World.
There is a sense that it is not in the interest of any country that is currently in the union (or outside of it for that matter) for it to fall apart without some kind of exit plan so all sorts of minds will be working overtime to find a way to make it work if that is possible or have a soft exit if it isn’t.