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The German economy is undoubtedly the
powerhouse of Europe. As a result, an understanding of the developments
within Germany can offer a strong indication of the path that the rest of
Europe is likely to take. Until recently, Germany stood as a bastion of sound
money against those Keynesian led regimes in the developed nations that favor
continual currency debasement as an economic panacea. Throughout much of the
past decade the German monetary bias was upheld by the Frenchman Jean Claude Trichet, the president of the European Central Bank.
During Trichet's tenure, the ECB's policies so
closely mirrored the philosophy of Berlin that many considered him to be
German in everything but accent. But the arrival of the Italian central
banking technocrat Mario Draghi as head of the ECB,
and the changing tone from Germany herself, indicate that a new monetary era
had dawned.
Recently, German politicians, led by
Chancellor Angela Merkel, have begun signaling greater comfort with monetary
debasement, even while the top bankers at the German Bundesbank
remain firmly committed to sound money. All eyes turn now to the long awaited
ruling of the German Constitutional Court on September 12th. Simply stated,
the Court will rule as to whether it is constitutionally permissible for
Germany to finance the debt of other nations. Before it abandons its preference
for sound money, German leaders would do well to consider the long term
consequences.
The UK and the U.S. were once the two
richest nations on earth. Today, having followed Keynesian money debasing
policies, they are among the world's largest debtors with their economies
approaching possible deep recession. Indeed, today the U.S. Treasury's debt
exceeds $16 trillion. America has joined Portugal, Iceland and Greece with a
Treasury debt larger than its GDP. Nevertheless, the Anglo-Americans have established
a considerable following of central banks around the world that are engaged
in monetary debasement.
Having experienced the ravages of the
1920's Weimar economic collapse, Germans have been dedicated followers of the
Austrian School of sound money. As the leading exponent of sound money,
Germany has garnered sympathy with Switzerland and the Netherlands. More
recently, resource-rich nations such as China and Russia have joined this
loose grouping and are calling for a replacement for the U.S. dollar as the
international reserve currency.
We have referred repeatedly to the
fundamental struggle taking place between the Anglo-American led money
debasers and the German led sound money nations. Now, it appears increasingly
that a major split is occurring within Germany itself. This has the potential
to set the world on a downward spiral towards a hyper inflationary currency
crisis.
Facing the difficult task of calling for
continued austerity while holding together a tenuous political coalition,
Chancellor Merkel looks ready to cave into expediency. Facing external
political pressure from Anglo-American led Keynesians,
Merkel appears ready to ask the German public to finance the rescue of their
less successful Eurozone partners. It could also be that German politicians
see this expensive course as a costly but rewarding path to their eventual
political control of the European Union.
Unfortunately for Merkel and Draghi, the powerful Bundesbank,
led by Jens Weidmann, does not agree that the
benefits of debasement outweigh the risks. In particular, Weidmann
objects to Draghi's preference for American style
quantitative easing of Eurozone bonds. He believes, quite correctly, that
purchases of sovereign debt of insolvent nations would put at risk the
savings of German citizens. In addition, he has indicated that the policy
would be in direct contravention of the European treaty.
If the German Constitutional Court rules
against German rescue plans for other nations, the Bundesbank
and all believers in sound money can breathe again. However, it could imply
an urgent and possibly terminal threat to the euro. Likely that would imply
considerable short-term monetary volatility involving a short-term price
spike in the U.S. dollar and a longer-term increase in precious metals
prices.
Given the almost unprecedented monetary
and economic implications and the resultant wall of Keynesian political
pressure being brought to bear, most observers may judge that the German
Court will succumb under the cover of some form of legal camouflage language.
However, it is important to remember that in the past, the German
Constitutional Court has not shown itself to be a political pushover.
Nevertheless, this time its decision could be literally earth shattering. It represents
an awesome responsibility.
John Browne is a Senior Economic Consultant to Euro Pacific Capital.
Opinions expressed are those of the writer, and may or may not reflect those
held by Euro Pacific Capital, or its CEO, Peter Schiff.
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