Last week's media headlines focused on how the election
results in France and Greece reflected a wave of rising public resistance
across Europe to the austerity programs being championed by Germany, the IMF,
and the EU. Less notice has been given to Germany's internal revolt against
Chancellor Angela Merkel's conservative policies at home and abroad.
Elections in the north German state of Schleswig-Holstein just ended the dominance there of Angela Merkel's Christian Democrats (CDP/CDU) while emboldening the center-left Social Democrats (SDP), hard-left Greens, and libertarian Free Democrats (FDP). Those results are expected to be repeated at this Sunday's ballot in North Rhine-Westphalia, Germany's largest state.
Taken together, these elections send a message to the
Chancellor that support for her assistance-for-austerity program is eroding.
Instead, Germans are increasingly choosing more radical positions. Those in
favor of austerity are losing patience with subsidizing Greek largesse, while a
larger majority is tiring of austerity altogether. There is talk that this
polarization may eventually lead to an unprecedented "Traffic Light
Coalition" of the SDP ("the reds"), FDP ("the
yellows"), and Greens at the federal level. This coalition would likely
offer a policy program in direct opposition to the current Government, with
great implications for the eurozone.
Chancellor Merkel's Government has walked the fine line
of tending to traditional post-war German sentiments of fiscal and monetary
prudence and trying to hold together the currency bloc dominated by Germany.
This dual mandate manifested itself in massive assistance for Greece, Ireland,
and Portugal in return for harsh austerity measures. The Chancellor's
supporters see this as a moderate and prudent compromise - but as is the case
with such arrangements, all partisans are left with grievances.
The German left - represented by the conventional SDP and
the radical Greens - largely supports the subsidies being sent to the
eurozone's weaker members but also questions why belts must be kept so tight at
home. In their utopian Marxist vision, all Europeans should be living a life of
plenty and no one should truly be asked to work for it.
The German right - represented by Merkel's conventional
CDP and the radical FDP - was initially interested first and foremost in
preventing a shock to the market caused by the failure of one of the PIIGS
(Portugal, Ireland, Italy, Greece, or Spain). However, as these peripheral
nations have rebelled against the austerity requirements accompanying the
assistance Germany has offered, many of the more market-minded members of the
right have begun to see the euro as a lost cause and a drag on Germany's own
economy.
If this trend continues, the next federal election could
see the current Merkel coalition lose out to the Traffic Light Coalition of the
left-wing parties and the radical-right Free Democrats. The resulting policy
agenda could include both increased public expenditure at home to placate the
left wing and a withdrawal from the eurozone at the behest of the radical
right. As with the current policy, this will be a mixed blessing for global
investors.
A German withdrawal from the eurozone would utterly
undermine the world's second reserve currency. The ECB absent of German
influence would be pressured by the likes of France and the PIIGS to devalue
the euro expeditiously. This would have dramatic implications for world trade
and for the international monetary system. It may even forestall the further
decline of the dollar as investors run away from the euro and into the relative
stability of the US for a time.
However, for Germany, I believe it would be a decidedly
winning move. Even with less fiscal prudence under the dominant left-wing
parties, inflation hawks would likely retain their historic control of the
Deutsche Bundesbank, which would resume issue of the trusty Deutsche Mark.
While the SDP/Greens' public-sector expansion might precipitate a crisis far in
the future, Germany currently has the domestic surpluses and industrial
capacity to underwrite their foolishness.
If Germany decides that its economic system is
fundamentally incompatible with a neo-Keynesian Europe, it may shift its trade
focus to emerging BRICS countries, some OPEC members, and even resource-rich
Western nations like Australia and Canada. I believe that such an economic bloc
would favor a gold-based international monetary system, which may actually lead
to the ultimate demise of the fiat money system advocated by Washington and
Brussels.
In summary, beneath much media noise about the backlash
against austerity in bankrupt nations, it is actually once again the German
electorate that may hold the fate of Europe in its hands. Let us all hope they
choose the course of least devastation and watch carefully to position our
investments for any outcome.
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