STAFF NEWS & ANALYSIS
Germany's Backing of Redemption Pact Signals End Game for Europe?
By Staff News & Analysis - June 14, 2012

Germany signals shift on €2.3 trillion redemption fund for Europe … the German government has begun opening the door to shared debts for the first time in a profound change of policy, agreeing to explore proposals for a €2.3 trillion stabilization fund in order to stop the eurozone's crisis escalating out of control. Officials in Berlin say privately that Chancellor Angela Merkel is willing to drop her vehement opposition to plans for a "European Redemption Pact", a "sinking fund" that would pay down excess sovereign debt in the eurozone. – UK Telegraph

Dominant Social Theme: One way or another, the EU and euro shall be salvaged.

Free-Market Analysis: Is the Euro-crisis finally coming to an end? Just yesterday, we pointed to the intractability of the larger European position regarding any EU "bailout."

But we have also previously covered Ambrose Evans-Pritchard's reporting on the so-called sinking fund that has been proposed – and increasingly this seems to be a solution that may be headed for adoption. You can see our previous article here: "Nothing But A Full Union Will Do…"

It is an intriguing concept, not least because it involves gold. Ironically, it is also illegal.

Basically, a fund such as this would supposedly allow European countries to guarantee each other's debt even though individual countries would be responsible for payment.

For proponents – and Evans-Pritchard seems to be one – a sinking fund provides a certain level of constitutionality in large part because it would be backed by a good amount of gold. "Italy and other states would have to pledge gold and other forms of collateral equal to 20pc of their debt in the fund," he announces.

In fact, as the article itself points out, a sinking fund such as this provides the appearance of legality but not the letter. Like everything else Eurocrats try to do, it stretches the letter of the law and more importantly the spirit. Here's some more from the article:

The Redemption Pact covers all public debts of EMU states above the Maastricht limit of 60pc of GDP, roughly €2.3 trillion. It is modeled on Alexander Hamilton's Sinking Fund in 1790 to clear up legacy debts after the American revolutionary war …

It is not yet clear whether Chancellor Merkel can persuade her own party to support the Pact. Her own finance minister Wolfgang Schäuble poured cold water over the idea earlier this week. "This fund is not feasable because it breaches with the European treaties and the `no bail-out' clause, which says countries cannot be responsible for the liabilities of another country …

Mrs Merkel rejected the Redemption Pact last November as "totally impossible", even though it was drafted by Germany's Council of Economic Experts or Five Wise Men and is widely-viewed as the only viable route out of the current impasse.

Jose Manuel Barroso, the European Commission's chief, warned that Europe faces a "social emergency" . Countries sticking to reforms are engulfed by forces beyond their control. "We must recognise that we have a systemic problem. I am not sure the urgency of this is fully understood in all the capitals," he said in a thinly veiled attack on Berlin.

Evans-Pritchard is positively chirpy about the evolving solution. He writes, "The idea is to treat the first decade of monetary union as a learning experience — with mistakes made all round – and allow a fresh start. The excess debt would be paid down over twenty years. … The beauty of the proposal is that would return Europe to the Maastricht discipline where each state is responsible for its own debts. It is the exact opposite of fiscal union."

We beg to differ. There is nothing beautiful at all about the increasingly authoritarian and undemocratic European Union and there is nothing especially savory about "saving" said Union with a fund that proposes joint liability but pretends that it is no such thing.

Ironically, top Eurocrats are turning to gold as the key to unlock this endless "sovereign" crisis. Having blasted gold as a "barbaric relic" for most of the past century, it now seems that gold has become the indispensible metal. No gold, no assurance of solvency and no sinking fund.

But there is gold, apparently – a good deal of it in central bank coffers. And there appears to be a willingness to create such a fund, as well, one that would provide over US$ 2 trillion worth of solvency.

According to Evans-Pritchard, a major potential problem – the resistance of Germany's constitutional court to such a fund – has been neutralized without a shot being fired. He writes that those at the top court "say it appears compatible with the country's constitution — unlike eurobonds."

Why? Well, there would be a fixed limit to costs and the fund would not "endanger the tax and spending sovereignty of the Bundestag." Funny, it seems to us that a shared-liability is a shared liability.

Later on, Evans-Pritchard writes: "The fund would entail sacrifices for Germany. The country would no longer enjoy safe-haven borrowing costs − curently 1.48pc for 10-year Bunds − on a quarter of its total debt. A study by Jefferies Fixed Income concluded that it would cost Germany 0.6pc of GDP each year."

How this is "constitutional" as regards Germany is beyond us. Evans-Pritchard continues to gloss over the issue by writing that the anti-constitutional argument overlooks "tough conditionality" … "The assets could be taken from the country's currency and gold reserves. The collateral nominated would only be used in the event that a country does not meet its payment obligations."

Additionally, he writes, Berlin would have veto lockhold, able to ensure discipline in a way that it cannot do with the European Central Bank where it has just two votes.

Details? The debt would be covered by "joint bonds" and each country would be responsible for its own share of debt in the fund – Italy €960bn, Germany €580bn, France €500bn and so forth.

Again, a joint bond is a joint bond is a joint bond – and the fund is only going to be insured via gold to 20 percent of its value.

What is happening here is that the German constitutional court is using a technical argument to get out of the way of a metaphorical onrushing train. It is perhaps likely that such a fund – backed by yet another tax – will be sizable enough to get the job done.

It seems obvious to us that this deal is outside both the letter and spirit of the law. But that has never yet stopped the Brussels criminal element.

The power elite that set up the EU to begin with as s steppingstone to world government may have their euro after all, provided those involved can move fast enough and politics don't prove an insurmountable obstacle.

Evans-Pritchard seems relieved. He's spent a number of years as a principled opponent of the EU, but we've detected a substantial change of tone in his articles of late. He writes:

Any … costs will be outweighed by massive relief as Europe finally breaks the logjam of the last two years and offers southern Europe a chance to claw its way out of perpetual depression. Mrs Merkel is beginning to agree.

As we have written in the past, Merkel never DISAGREED. She is a bought-and-paid for agent of what has been termed the "new world order" and the problem that Merkel has had in the past stems from the larger reluctance of German voters to be potentially liable for the debts of most of the Southern part of the EU.

After Thoughts

The average German may yet retain these doubts but from what we can tell this "sinking fund" may be deployed aggressively to assuage them.

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