Germany and France Divided: End of The Road for The Euro? New Beginning for the Deutsche Mark?

By: DK_Matai

1. Divisions between Germany and France have widened significantly in regard to a common Eurozone solution as borrowing costs outside of Germany rise to euro-era records;

2. The German government is standing firm in its opposition to deploying the European Central Bank (ECB) for the bailout of faltering Eurozone sovereigns;

3.  Germany has drawn a clear line in regard to their commitment to the European Financial Stability Fund (EFSF) beyond which there will be no further pan-European support for bailouts;

Deutsche Mark Resurrection?

4.  This means that the fate of the sovereign debt of each Eurozone member nation now rests with that nation and therefore that country may be at the mercy of the global financial markets;

5.  The German finance ministry and the Bundesbank are acutely aware that their own banks are in need of substantial recapitalisation assistance especially as they have now begun to suffer severe downgrades and restricted access to capital markets;

6.  It is clear that the German government neither has the mandate nor the capacity to embark simultaneously on debt pooling with sovereign nations like France, Italy and Spain whilst bailing out its own technically insolvent financial institutions;

7.  One core scenario under discussion envisages the printing of new money by the ECB in trillions -- historically of great concern to the German people -- at which point Germany exits the euro and resurrects the Deutsche Mark;

8.  There appears to be no reason for either the government of Germany or France to announce this decisive development until the Eurozone bond markets begin to boil over, which could prove to be a dangerous strategy;

9.  Global media are already reporting different aspects of this widening rift between Paris and Berlin; and

Conclusion

10.  If Germany were to resurrect the Deutsche Mark, the consequences may prove not to be benign either for the Eurozone or Germany.  Germany has been absolutely consistent in its opposition to sovereign debt pooling and the printing of money, which are impossible for it to undertake in the absence of thorough Eurozone reform.  It seems that other Eurozone nations are slow to realise the unambiguous nature of the German stance.  Germany consequently faces the unpalatable position of appearing to have reached the end of the road for the euro project, arguably through no fault of its own.  The resurrection of the Deutsche Mark is likely to be a regrettable turn of events for the Germans, but one that is unavoidable while their political neighbours insist on maintaining the illusion that debt sharing is a viable prospect for the Eurozone.

What are your thoughts, observations and views? We are hosting an Expert roundtable on this issue at ATCA 24/7 on Yammer.

By DK Matai

www.mi2g.net

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