One month ago it appeared that Germany held the whip hand in its titanic struggle against those seeking to cure all economic ills with the snake oil of currency debasement. Now, it appears that the ground beneath its feet is being swept away in a flood of popular unrest and political exploitation. The recent elections in Europe, which highlight both the strong grass roots revolt against Germanic demands in Greece and France show that the cause of sound money and fiscal prudence to be a lonely and difficult endeavor.
The political isolation will likely weigh on the Merkel administration to abandon their monetary obstructionism. Unfortunately, Merkel has suffered recent election losses at home that seriously undermines her grip on power (see last week's column)
. Having suffered the chaotic, and socially destructive consequences of a collapsed currency in the early 1920's, the German people are firm believers in hard, effective work and sound money. Despite having one of the strongest currencies, Germany had been the world's leading exporter, until only recently having been overtaken by China. But this preference does not appear to be shared by the nations in which she is bound by monetary union.
Germany accepted the formation of the eurozone on the condition that the euro would remain a sound currency. To her credit, France has largely honored her pledge to support this aim. However, the recent election of Francois Hollande as France's President has placed continued French support in question creating severe political problems for the German government. To make matters worse, the recent elections in Greece threaten to dissolve the budgetary demands that Germany imposed on Greece in exchange for bailout funds. These agreements took months to negotiate and now may not be worth the paper upon which they are written.
Germany's belief in sound money mandates that wasteful government spending must be reduced. Furthermore, the Germans believe that, despite recession, it is better to endure economic and social pain now to achieve real growth, sound money and social stability over the long-term. The Anglo-Americans believe the contrary, that austerity will create unacceptable social unrest and that governments should increase spending even if they have to borrow massively, recklessly expand the money supply, risking high inflation to do so. But as the teeth of these policies inflict short term pain, as they are designed to do, rank and file voters revolt.
In Greece, the right wing parties of LAOS, Golden Dawn and the Conservatives lost heavily, with their share of the vote shrinking by more than half in some cases. Even the Socialists lost heavily as votes flowed leftwards to the Democratic Left, SYRIZA, led by Mr. Tsipras, and to the Communists. As no party seems able to gather a majority coalition, most likely there will be further elections in June, when it is expected that the left will consolidate and increase its gains. All three of these left leaning parties have declared austerity to be dead on arrival.
Most Eurozone banks and governments hold Greek government paper. If the Greeks default, the Eurozone, the EU and possibly some major U.S. banks will be put at risk. In addition, if other Club-Med countries see this happen they may be tempted to join the ranks of Greece and Iceland as preferring default to foreign-imposed austerity.
If Italy or France were persuaded to default, the Germans would have to consider leaving the Eurozone. The euro would be in danger of collapse and with it possibly the EU superstate, reverting to its originally declared form of a free trade area. The collapse of the EU, now the world's largest economy with a GDP of some $17.4 trillion and the euro as the second currency, would be potentially devastating to the world economy and to the international fiat currency system.
Doubtless, massive diplomatic pressure is now being put on the German government to ignore its peoples' wishes for a sound currency and to join the Anglo-American led Keynesian club of monetary debasers. It's hard to imagine if the German's longstanding aversion to money printing can be overcome in order to maintain the status quo.
Should Germany succumb, the world probably will experience a short-term boom before sliding into a long and severe period of depression, hyperinflation and ultimately stagflation. From my perspective, this could lead to a renewed global polarization with some countries drifting toward Communism while others drift towards the stability of a new international gold standard.
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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