Germany is having to show more of its hand

In my predictions for 2011 post from earlier this week I said that the net effect of the European financial crisis would predominately be political.  Specifically what I expect the long-term affect to be is a stronger, more expressive Germany.  While much of the German public is opposed to the European Union and to the euro, the Germans benefit from the free-trade arrangement to a much larger extent than any other nation in Europe.  The reason is very simple: the Germans are exporters par excellent and the massive free-trade zone has enriched Germany and its people.

Throughout the 2010 crisis there has been scant mention of that fact.  What also has been largely unnoticed is that the Germans are actually using the crisis to increase their power in the EU.  This morning in Berlin German Chancellor Angela Merkel began laying out some of her government’s cards on the table.  Specifically she said:

“Germany especially profits from this community, from the common market…The euro is our common destiny, and Europe is our common future.”

What is new about this statement is the clear statement that Germany “especially profits from this community.”  And what that means to us as investors is that Germany is in the awkward position of needing to be the underwriter of its trading partners/EU members’ debt problems.  That is why I repeatedly discount the threat of a eurozone meltdown.  The healthy states in Europe, especially Germany, simply cannot let it happen without then threatening the entire Union.  And that Union works disproportionately well for the healthy states in Europe.  The big bad wolf of debt has blown down the straw houses and is threatening some of the wooden ones, but it does not threaten the brick houses of the EU.

Interestingly, the Chancellor also reiterated that she is opposed to euro-zone bonds being issued.  Those bonds would be a massive transfer of wealth from the healthy sovereign states to the unhealthy states of Europe as the entire community’s governments would be responsible for the guarantees on the bonds.  Additionally, the commonly issued bonds would have the effect of raising interest rates for the healthy states.  Therefore, the Germans objected.  What this means is that there is a lot of negotiating going on to establish German dominance of the EU.  It is trading its foundational, brick house strength, in exchange for more power, but all without really leaving the house.

Jason