When it comes to the crunch with the euro, economics will trump law … As the euro crisis has intensified, so the previously unthinkable has become the subject of widespread discussion. People have woken up to the idea that the euro could break up. Everywhere you hear the same refrain: how do you break up a monetary union? – UK Telegraph
Dominant Social Theme: 'When I use a word,' Humpty Dumpty said, in rather a scornful tone, 'it means just what I choose it to mean — neither more nor less.' … 'The question is,' said Alice, 'whether you can make words mean so many different things.' … 'The question is,' said Humpty Dumpty, 'which is to be master — that's all.'
Free-Market Analysis: As expected, the German constitutional court ruled yesterday that Chancellor Angela Merkel's bailouts of Europe were constitutional but that a Parliamentary subcommittee needs to approve Merkel's moves in the future.
The Treaty clearly states such bailouts are unconstitutional but in such instances, justices can apparently determine unstated and invisible penumbras of meaning (as the US Supreme Court has done in the past) that provide a different context and justify almost any interpretation.
The decision was in line with what many had expected; really, anything else would have precipitated an immediate political and economic firestorm, even though what Merkel has been arranging on a regular basis with France's Nikolas Sarkozy is questionable in the extreme. (And Germans WILL ask questions, and are beginning to do so.)
Most recently, Merkel and Sarkozy have agreed to a closer political-economic union to begin in a few years' time. It is one that may necessitate changes to the EU's operating treaty, though. Why Merkel believes she can commit her fellow Germans to becoming part of a larger French-German entity is somewhat unclear, especially since her own party keeps losing elections as a result of her integrationist policies.
She treated the court ruling as an unmitigated success, nonetheless, saying the ruling confirmed the government's policy. She also said Greece – the proximate cause of Merkel's problems – should never have been admitted to the EU. (Too late now for that particular rethink.)
Dow Jones reported, "'The Federal Constitutional Court this morning [Wednesday] absolutely confirmed [our policy],'" Merkel said. "'That is exactly the path we have been taking.'" Dow Jones also reported that Merkel launched a fairly emotional defense of her policies in a speech to Parliament. Here's some more from the article:
Merkel, a physicist by training, is known for her sober style. But on Wednesday her language was at times emotional. She defended the euro as more than just a monetary union, suggesting it was also a vehicle for political cooperation in Europe after centuries of war. "History tells us that countries that have a common currency never have waged war against each other," Merkel said. "The euro is much, much more than just a currency."
Merkel also said that Switzerland's move Tuesday to cap the franc's value shows the vulnerability of single countries in the global economy. Switzerland "has de facto pegged its exchange rate to the euro, because the strength of Switzerland becomes its own weakness if it doesn't fit into the whole global structure," Merkel said. "That's the lesson. And because of that the euro is right."
The line about the EU as a bulwark of peace is extremely cynical. We've read it elsewhere recently. It's a kind of subdominant social theme, and one that the powers-that-be regularly present to provide evidence of their high-mindedness. In fact, insisting on a union that people do not want is more likely to precipitate violence than alleviate it.
As for the Swiss franc, well, we wrote just yesterday that the Swiss cap on the euro was anything but a rational outcome, as Merkel insists. "The euro is right," she claims. Actually, Merkel is wrong. There is every evidence that the power elite standing secretively behind the EU shoved Switzerland in the direction of its decision.
The elites want a greater union as a stepping stone to world government. They are doing exactly what was predicted: using the current economic crisis as a justification for a more perfect (political and economic) union.
But Merkel, who is obviously putting the best face on the matter, ought to realize that at some point the laws, court decisions and rulings from the top down by the EU's paid politicos are not going to carry the day. Legalisms won't trump survival.
The Telegraph article (excerpted at the beginning of this article) makes this point as well. It is written by Roger Bootle (whom we have followed in the past), the managing director of Capital Economics and an economic adviser to Deloitte.
The powers-that-be have done everything they can do to ensure there is no exit from the EU, including leaving out any provision for it in enabling language, Bootle reminds us. "That was deliberate. It was intended to make it clear that the eurozone was forever – like the Soviet Union and the Holy Roman Empire. But in fact you cannot legislate for changing economic conditions or changes in peoples' attitudes. Countries have left monetary unions before."
This is a significant point, and one we have been making as well. Bad laws that constrain people and place them in perilous situations are likely not going to stand. Once people decide they have no more to lose, the "laws" themselves lose their persuasiveness.
Bootle points this out, as well. "There would surely be chaos for a time in the eurozone. But it could be done. When it comes to the crunch, what is and is not in the European Treaties will become irrelevant. Economics will trump law."
People will not starve in the dark. Just as the German court ruled yesterday that Merkel's unconstitutional deals were constitutional, so an exit path will be discovered from the euro if people want it badly enough.
"The notion that … difficulties will prevent a country from leaving or the euro from breaking up is absurd," Bootle writes. "What has to happen will happen."
Bootle's scenario is actually a fairly simple one. A country could announce its own central bank – one that would purchase government debt as, say, Ben Bernanke has been doing with his quantitative easing measures, purchasing US debt as a buyer of last resort.
The government would also announce a formal conversion rate against other currencies, but it is likely the market would not accept the rate. "That's where so much of the advantage would lie. At a stroke, it would be possible to lower the country's price level compared with the rest of the eurozone and to the outside world."
Bootle points out that this sort of maneuver has taken place numerous times, even in the modern era. Unless the EU is prepared to invade Greece or Spain with a non-existent army, there is not much to stop a newly elected government from carrying out its campaign promises and removing a country from the EU, laws or no laws. He continues,
"The European policy elites are still in denial. If the euro splits, it will probably happen in a panic, when a decision is forced within a narrow time frame, just as happened with the pound's departure from the Gold Standard in 1931, its exit from the ERM in 1992 and the collapse of Lehmans in 2008. Incidentally, these all happened in September. And the 1929 stock market collapse happened in October – as did the crash of 1987. Fasten your seatbelts: we could be in for an interesting few weeks."
We just read a long peroration issued by UBS (of all banks) on how the breakup of the EU was impossible, how chaos would be result and anarchy the outcome. But it stuck then (and now) that these were simply words … only opinions.
Reality is always determined on the ground – by armies and violence or by the mass of a motivated people worried about their next meal. Starvation, if it comes to that, certainly concentrates the mind.
If times are bad enough and the options unpalatable, people will demand action. All the "laws" in the world will not stand against an aggregate survival instinct. This is what Ms. Merkel is missing when she celebrates the court decision. Her assertion of victory, such as it is, may be premature.