STAFF NEWS & ANALYSIS
From German Recession to Euro Jeopardy
By Staff News & Analysis - April 26, 2013

Germany will enter recession, says George Soros … As one of America's most successful investors warns the eurocrisis is far from over, we consider the investment case for Europe. Investors can be forgiven for feeling jittery about the eurozone again, after George Soros, America's most successful investors suggested the economy in Germany could be pulled under by the crisis. …"I expect … by the time of the elections, Germany will also be in recession." Is this the beginning of the end for the eurozone? Should investors cut their losses and run? Or could another period of instability provide rich picking. After all despite the debt crisis European stock market outperformed many other Western markets last year. This week's briefing assess what happened in this troubled region, and looks at option for investors now. – UK Telegraph

Dominant Social Theme: Europe is in trouble. Our biggest problem therefore is separating stock market winners and losers.

Free-Market Analysis: This is a funny article because it begins by addressing significant issues seriously (see above excerpt) and then abruptly veers off into an analysis of European stocks and then simply winds down without providing any answer to the provocative issues that have been raised.

We will therefore try to add some insight to an article that started well but petered out. You see … the issue for us is NOT just what is going to happen to EU stock markets but what is going to happen to the EU! This has been a momentous week for the EU and let us remind you, dear reader, what has just taken place.

First, the doctrinaire policy of "austerity" has virtually crumbled, with top Eurocrats coming out against it. And in this issue of the Daily Bell, you can read about a top German banker declaring publicly that the euro itself will likely not exist in five years.

Add to these items the above news that George Soros believes Germany is about to go into recession and you've got one king-size mess on your hands when it comes to sustaining the euro within the context of defaulting PIGS – and just as importantly shoring up the integrity of the EU itself.

It is, in fact, our humble view that the EU itself IS in jeopardy, especially if Germany lapses into recession. We never thought the crisis was merely about the euro, and we don't think those in Brussels ever did, either. The reason they have fought so hard for the euro is because the EU itself is at risk once the euro is banished.

Oh, it is possible that one might end up with a rump euro or a rump EU, but that was NEVER the point of this exercise. The idea seems to have been to create a European super state that could serve as a building block to the penultimate globalist construction of a single worldwide central bank, economic union, etc.

A rump EU comprising Northern Europe would not satisfy this ambition and would, in fact, produce an impediment, as it would tend to assume powers out of proportion to the rest of Europe. Rather than a smooth integration of a continent, one would end up with a bisected euro-region with no affinity for larger mergers.

And if Germany goes into recession, all of this will grow even more complex and contorted. Many Germans – apparently the majority – have no great affinity for the euro as it is currently constituted, nor even for the EU, at least not if they have to foot the bill.

A German recession will make the cooperation of the average German even more problematic and leave German Euro-centric leaders even more cut off from the sympathies and prejudices of the average German voter.

The current crop of German citizens seemingly have no world-spanning ambitions, nor do they aspire even to leadership of Europe if it means that they are to be pauperized in the process. A German recession would only aggravate the situation. But according to Soros that is just what is about to be served. Here's more:

Put simply – some European countries spent cash they did not have and then required help from richer nations to pay for public services. This has meant handouts from solvent countries in the eurozone (like Germany), and bailouts from the International Monetary Fund (IMF). In return these countries have been required to implement drastic spending cuts.

It's been three years since Greece was first bailed out to the tune of €110bn. Since then, Portugal has received €78bn from the IMF, Greece received a further €120bn and Spain's banks have been propped up by eurozone funds. Ireland has also received a €85bn boost.

Although there was much talk of Greece exiting the single currency, thus far the concept has been dismissed.

The problem is that the pool of solvent countries is shrinking, and these countries have their own growth problems. The German government has predicted economic growth of just 0.4pc this year; while both the UK and France have both lost their AAA credit rating.

Most recently Cyprus has required a €10bn bail-out – which led to a tax being imposed on its own savers. Italy has also failed to form a government following elections in February. These factors have caused the euro to fall in value against the dollar, and there are concerns that this could have a knock on affect on the share prices of many large European companies – particularly banks …

Germany has taken an active role in proceedings but now faces elections itself, the outcome of which are uncertain. This could potentially further derail European recovery.

This last graf marks the beginning of the deflation of this article's insights. In the very next graf, the author asks, "How has this affected the stock market?" But there is no telling how the current uncertainty is going to affect the stock market, at least not at the moment, because there really is no telling what is going to happen to the euro or even the EU.

The article suggests that EU equity volatility will become worse before it becomes better, especially if Germany goes into recession, but that is a bit like saying a trip across the ocean is going to include some choppy weather. It is an observation not an opinion.

At the beginning of this article, we said we would try to go further by adding additional insight, and we conclude by attempting to do so. We think the demise of the euro may indeed be predicted by a German recession. And we think so for two reasons.

First, the German electorate could simply and vehemently make clear it is not willing to fund the larger euro project, in which case, absent German support, the euro will probably implode.

Second, the top Brussels elites including German bankers and pols could insist on moving ahead with the full project, in which case the unrest in Southern Europe might spread more fully to France and even Germany, which would be a most significant evolution.

After Thoughts

Either way we think the euro itself is in deep trouble, and it probably spells big problems for the larger project itself.

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