Notes From Underground

There was singing in Rome when Angela Merkel announced that she is stepping down as the leader of the Christian Democratic Union. The two most recent German regional elections has solidified the unmitigated truth about the weakened condition of the German chancellor. For the last six years, I have been highly critical about Merkel’s policies. The bumbling French President Nicholas Sarkozy out-maneuvered Merkel in 2011 as he prevented then-Bundesbank President Axel Weber from leading the ECB.

The French could not tolerate a hard-money advocate like Weber pushing a Bundesbank agenda as the mighty French state machine needs low interest rates to keep the bureaucracy operating without high debt servicing costs. The French could pay lip service to the German fiscal austerity as long its borrowing costs are low. (Yes, I know that it was ECB President Trichet, a Frenchman, who blundered by raising rates twice in 2011 and set the stage for the financial crisis in the European periphery. But I have maintained that Trichet was more German than any Bundesbanker when he invoked the policy of Le Fort Franc in 1991.)

Chancellor Merkel needed a German at the ECB in order to maintain German popular support for an aggressive ECB liquidity/QE program. Since the onset of negative interest rates and massive ECB asset purchases, it has been the German savers that have been financially repressed.

The full impact was realized this week as German inflation data showed that some regions’ price increases reached an annual rate of 2.5 percent. By what measure of financial responsibility does a country have more than 2% inflation with a TWO-YEAR NOTE yielding -0.62 percent? (Yes, a negative real yield of 3.12 percent if you are purchasing the aforementioned debt instruments.) The popular narrative is that Merkel is suffering due to her stance on immigration but that is so flawed. The rise of the Alternative for Deutschland (AfD) was initiated by a group of economists challenging the policies of the ECB. The issue for the Germans was if fiscal profligacy was going to be the guiding principle of the EU, how was it to be funded and what entity would bear the burden of being the creditor?

The Davos contingent, under the guidance of George Soros and others, were pushing for the Eurocrats in Brussels and Frankfurt to craft a eurobond to CONSOLIDATE all the sovereign debt of the EU nations. However, there was no Alexander Hamilton with the persuasive and political power to initiate such a program. Also, the legacy debt was so vast that the German elite was terrified of asking its voters for the authority to be encumbered by such a great fiscal responsibility. Frau Merkel and her fiscal stalwart Finance Minister Wolfgang Schaeuble opposed all entreaties by European and world politicians for such a program until the individual European states embarked upon policies of fiscal austerity to ensure that the debt level would shrink. The Germans insisted upon cuts in pension programs. Less social programs and even tax increases in order to meet the levels ordained by the Growth and Stability Pact. Greece and others were forced into what economists call INTERNAL DEVALUATIONS where wages are squeezed to levels that make the labor force competitive on a global scale. Export earnings coupled with reduced demand for foreign products will help build a country’s savings.

This German-sponsored program has created a great deal of ill-will toward Germany but much of the blame is to be directed at the ill-conceived structure of the EU itself. The creation of the EUROBOND should have been done with the advent of the EURO but the Germans would never have agreed to it under the conditions that existed in 1999. As I have stressed for years, the Draghi ECB has laid a trap for the northern European states by building up a massive balance sheet through QE.

The useful idiots would argue the counterfactual of what would have occurred if nothing had been done, but a usual the bean counters fail to measure the political fallout. The Italians, Spanish, Greeks and even the French were singing the European anthem, Ode to Joy, as Merkel has fallen from grace.

However in Rome the piazzas were alive with Ding Dong the Witch is Dead. Yes, Merkel is still Chancellor of Germany and is only stepping down as CDU party leader. But in echoing the thoughts of Professor Niall Ferguson, it is the height of arrogance for Merkel to remain chancellor. It is hard to believe the spineless Social Democrats will remain in a coalition with a weakened politician that has caused them to be relegated to a footnote in the current government and resulted in the party suffering humiliating losses in the recent regional elections.

AfD has consistently been out-polling the once proud beacon of German stability. Merkel needs to become less arrogant and give way to new people and new ideas.The current situation is creating the backdrop for severe disruptions to the EU system. The problem is that the entire edifice is held captive to the ECB’s massive balance sheet. Italy is temporarily rejoicing as it will be the recipient of a changing attitude in Europe and maybe the world over. Fiscal austerity will be giving way to fiscal profligacy. China, Brazil,Japan, Russia, Mexico, and yes, the post-election U.S. will all be pushing infrastructure programs in an effort to prevent an economic slowdown. The financial impact from such programs will be what we are concerned with as we go forward, but it seems that a global fiscal stimulus program will be well received by the G-20.

The fall of Merkel is celebrated in Paris as French President Macron seeks to become the focal point of European politics and the darling of the globalists. Remember, although Macron is very young and a political neophyte, Napoleon was 35 when he was named emperor. The tumultuous month of October has ended and yet the volatility has just begun. Europe is now entering the epicenter of instability. Ode To Joy?

Tags: AfD, Angela Merkel, CDU, ECB, EU, German, Italy, Mario Draghi, QE

This entry was posted on October 31, 2018 at 7:18 pm and is filed under Debt Market, ECB, Europe, Germany. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.