Notes From Underground: Germany and France Codify the Premise of Europe

In a desperate attempt to deflect from the damage to his presidency, Emmanuel Macron on Tuesday codified what Bernard Connolly has written about for 25 years. As Charles de Gaulle supposedly said to Konrad Adenauer: “Europe is France and Germany, the rest trimmings.” In a resurrection of European history, Angela Merkel and Macron signed a new Treaty of Aachen. While the treaty language is vapid, the symbolism cannot be minimized. Germany and France promise to come to each other’s defense if attacked while also promising to work for a more unified financial and fiscal system.

There is also speculation that France will work for Germany to get a permanent seat on the U.N. Security Council, especially since France doesn’t wish to give up its permanent seat. This is an absolute joke as it would take the unanimous vote of the Security Council. Any odds on Russia, China or the U.S. giving away its current authority to allow another European Union member a seat. Then when you throw in the U.K. and the state of Juncker’s vengeful behavior in regards to Brexit there is ZERO chance of Germany being a permanent member of the U.N. Security Council.

In regards to fiscal harmonization and a full European system of financial and banking insurance, Merkel said: “Take for example, business taxes or insolvency–much is historically structured in very different ways.We won’t change that overnight,it will take two decades.” Macron believes that those who oppose greater German/French reconciliation are doomed to repeat the past of the darkest moments of European history. President Macron, in my humble opinion, you just elevated the “yellow vests,” Brexit and the Italian government by engaging in an action that exemplifies the fears that many of the populists of Europe have in regard to Brussels. Also, in an effort to bring about a harmonized financial system and EUROBOND you have raised concerns among the Hanseatic League of who will be the major creditors for a massive EUROBOND: France with a GDP/DEBT ratio of 98%, Italy with a 132% ratio, Greece, Spain. And, oh yes, Germany.

In a further blow to the sanity of policy makers in Europe, on January 19 the Financial Times ran an article titled, “Time to Ditch Brexit, Say German Political and Business Leaders.” In a Letter to the Times of London, Annegret Kramp-Karrenbauer (aka AKK), head of the CDU, “called on Britain to abandon its departure from the EU.” She was joined by other German political leaders from the Social Democrats and Green Party, as well as the heads of large business federations and trade unions. The FT article notes that German business are very worried about Germany’s large investments in the U.K. as well as “bilateral trade in goods and services estimated to be worth $200 billion a year.” In addition, Norbert Rottgen, chairman of the Bundestag foreign affairs committee, hoped the letter would be a “nudge in the direction of a second referendum.”

The letter is pathetic as its tries to lighten the ridiculous by noting British humor, drinking after work in the pubs and having tea with milk. The timing of such an effort to push for a second referendum is complete insanity and makes the idea of Brexit even more desirable. The European elites are shameless. As usual, the insouciance is a result of the negative impact on Europe’s largest economy. Tuesday’s Aachen Treaty and Saturday’s German Letter leave me searching for some real leadership coming to the front because Europe is clueless.

The key to the entire EU financial edifice remains A EUROBOND, but if they cannot agree on the ultimate creditor then it will indeed take Merkel’s two decades. The EU economy is slowing. For me, I will buy the German bonds and sell the French as the most conservative play on the uncertainty plaguing the European political economy.

***Tuesday night the BOJ is expected to release its interest rate decision. The consensus calls for rates to remain at NEGATIVE 10 BASIS POINTS with no change in the QQE program. The quantity of assets the BOJ is purchasing is relevant only for the equity markets. Current policy has so badly broken the BOND market is already so badly it has little or no semblance of meaning. THERE WILL BE NO CHANGE as the BOJ and Kuroda will cite global economic uncertainties and lack of inflation in Japan to remain on hold. The YEN has been strong against the euro and other currencies so the BOJ has another variable to keep it steady as it goes. An important CURRENCY CROSS to watch is the CHF/YEN as both have relevance as they are deemed haven currencies.

Swiss National Bank Governor Andrea Maechler said Tuesday justified the central bank’s currency intervention thusly: “Our mandate is not to defend the Swiss franc, but price stability. We have seen that if the franc is too strong, inflation goes negative.”

The SNB has through its currency intervention process rendered the communiques of the G-7 and G-20 NULL AND VOID. The continued SNB rationale is what sustains being long GOLD and short various currencies. Everybody can say that currency intervention is part of a central bank’s mandate, although the U.S. is the only actual nation with a legislative mandate. Next up: The ECB on Thursday.

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11 Responses to “Notes From Underground: Germany and France Codify the Premise of Europe”

  1. raymack1999 Says:

    insightful as usual Yra. Thank you for the light in the darkness. Looking forward to your future work including “Selling England by the Pound”!

  2. asherz Says:

    This treaty will have the same result as its eponymous Treaty of Aachen of 1748. That one ended in a war 8 years later.
    This forced German’/French agreement partially resulting from Brexit will continue to give impetus to the populist right wing movements throughout Europe. Italy, Hungary, Austria and others will gain strength. The Alternative for Germany and the France’s National Rally will give Merkel and Macron little respite.
    The next economic slowdown will see Yellow Vest equivalents throughout Europe. The phenomenon of an Alexandria
    Ocasio-Cortez captivating the spotlight in such a dramatic fashion in the space of weeks, becoming the darling of the millennials, is something not to be underestimated. Will she burn out like a sparkler or start a serious populist movement? That remains to be seen. The huge and growing gap between the haves and have nots is resented, even in this period of 3.9% unemployment. When that number begins to rise and accelerate, what will be the reaction?

    • Alex Says:

      I believe there is a fundamental difference between the populist movements in Europe and one which would be led by the likes of Ocasio-Cortez. If a populist movement in the US were to resemble those in Europe it would be more like the “Boston Tea” movement. Populists in Europe appeared because of the austerity the working classes have been subjected to (and not the under-classes), but mostly they began with the immigration wave that Merkel started. What is not often spoken of in the media, is the fact that the native European or French will accept some austerity, but not if it is to see their taxes go to the millions of migrants from Africa and the Middle-East. Especially in the context of the bombings and other terror attacks that have been hitting the continent since the mass immigration began. As a European, I will take this opportunity to thank Mrs Merkel for this mess!

      • yraharris Says:

        Alex and Asherz—these are two very good posts.The German/French pact isan act of desperation at the wrong time for it reveals the non-democratic nature of the EU project and while Macron believes he has attained the moral highground in a very Helmut Kohl fashion he will be proven wrong–Helmut Kohl sold the EU project to Germany as insuring against another war in Europe,which is the ground that Macron is attempting to occupy.The problem for Germany is that as Otmat Issing has maintained—the German citizens have never been directly asked to support the projeect,hence taxation without representation.Alex–it is Merkel who created the back drop in many ways.The ultimate is the financial repression of the German savers through support for the Draghi regime.If the German economy continues to slow the AfD will be in an ever more important position–it is time for the CDU to cut the SPD away and turn to the tax cutting free democrats

  3. Michael A Temple Says:

    asherz
    You should read Seth Klarman’s comments yesterday (or Monday) about the fragility of our democracy and finances. He paints a scary future. The Dems are bound and determined, I believe, to nominate somebody with AOC’s political sensibilities (or is that insensibilities) who wants to level the economic playing field between the 0.1% and the rest of the “deplorables”. Radical socialism is their North Star and if a recession hits the US between now and Nov 2020, the electorate will be ANGRY and will toss Trump or whomever the Republicans put forth and usher in “radical” new policies. Can’t happen? Look how close Corbyn has come to becoming possibly the next British PM.

    Yra is very right….One of the best trade ideas out there is to position for a big yield curve steepener in UST.

    • yraharris Says:

      Michael A—thanks for putting the Klarman letter in play—haven’t read it but read the excerpts.The Gini,Jan Penn Parade and Tomas Piketty theses are in play because of the inane efforts of the central banks coupled with the grand theft of corporate money by the established elites –nothing says inequality then the measuring the remuneration gap between corporate pay levels over the last 50 years.Anybody buying US debt longer then ten five year duration must be ensconced in other peoples money—to quote a famous character—INCONCEIVABLE

  4. Arthur Says:

    “Franco-German understanding is a necessary but increasingly insufficient condition for progress. Worse, the pairing has few obvious allies. Britain is leaving. Italy is run by populists. Spain has a minority government. Poland and Hungary are run by illiberal parties. And no government wants to give institutions in Brussels more power to take the lead. Mrs Merkel and Mr Macron must realise that they cannot fill Charlemagne’s shoes. Their problem is that it is not clear anyone else can either.”

    https://amp.economist.com/leaders/2019/01/17/france-and-germany-plan-to-sign-a-new-treaty-in-aachen?__twitter_impression=true

  5. Robert Zimmerman Says:

    I believe Seth Klarman was right on point.

    “Helter Skelter”
    The Beatles 1968
    Lennon/McCartney

  6. GreenAB Says:

    Yra, allow me one question to understand the negative tone of this post.

    You don´t like the idea of deeper financial integration in the EU, hence you´d like to see to break it up eventually?

    As a backer of the EU i´m glad to see any effort to hamonise, since different taxes and regulations sit at the core of the problem: With a free European trade market companies move around to where they find the best conditions.

    Which keeps states finances and workers wages under constant pressure. The rise of populists or the yellow vests is built on the perception that globalization is a dynamic that favors capital over labor.

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