Germany Could Pull Out of the Euro Before Spain is Even “Saved”
Interest-Rates / Eurozone Debt Crisis Jun 23, 2012 - 09:18 AM GMTBy: Graham_Summers
As I’ve assessed in earlier pieces, neither the Fed, nor the IMF, nor the EFSF, nor the ECB has the firepower or the political backing to prop up Spain or the EU.
This ultimately leaves the ESM, the permanent European Stability Mechanism… which technically doesn’t even exist yet (it’s supposed to be ratified by July 2012).
That’s right… the bailout fund which is meant to SAVE Europe doesn’t even exist yet. And it’s not clear that it will anytime soon either…
Indeed, in order for the ESM to be ratified it needs the individual EU member states that will contribute 90% of its capitalization to first ratify it on an individual basis.
Here’s the list of countries that represent that 90% of capital as well as the status of their individual ratifications and the percentage of funding they are to provide.
Country |
Ratified? |
Percentage of Capital |
| Germany | NO | 27% |
| France | YES | 20% |
| Italy | NO | 18% |
| Spain | NO | 12% |
| Netherlands | YES | 6% |
| Belgium | NO | 3% |
| Greece | YES | 3% |
| Austria | NO | 3% |
| Portugal | NO | 2% |
| Finland | NO | 2% |
| Ireland | NO | 1% |
| Slovakia | NO | 0.8% |
| Slovenia | YES | 0.5% |
| Luxembourg | NO | 0.2% |
| Cyprus | NO | 0.1% |
| Estonia | NO | 0.1% |
| Malta | NO | 0.07% |
To summate the above chart succinctly… only four of the required 17 countries have even ratified the ESM (it’s supposed to be completely ratified in July 2012).
Moreover, you’ll note that the PIIGS as a whole are meant to contribute 36% of the ESM’s FUNDING!!!! Spain and Italy alone are meant to contribute 30%!!!!
So… Spain is supposedly going to be bailed out by an entitythat doesn’t even exist yet… for which Spain is mean to contribute 12% of the funding. And to top it off… Spain hasn’t even ratified the fund itself!!!
More importantly, neither has Germany. And it’s not clear that it will either.
To whit, Germany’s ratification of the ESM is buried in legislature that includes, among other things, the proposal of a financial transaction tax, which is extremely popular with the Social Democrat Party (SPD), the main opposition party to Chancellor Angela Merkel’s Christian Democratic Union (CDU).
Thanks to recent elections, which saw Merkel’s CDU party get trounced (again, German voters are FED UP with bailouts), the SPD now controls 11 of Germany’s 16 states.
This is a big deal because the SPD is playing hardball regarding the passage of the ESM legislation due to the fact that Merkel is not viewed to have been serious about implementing the transaction tax proposal (which the SPD is pushing for along with various other growth measures for the Germany economy).
Merkel is scheduled to meet with the opposition leaders tomorrow. If they cannot strike a deal it is quite possible that Germany won’t be able to ratify the ESM legislation before the July 1 deadline.
The SPD made it clear that it is willing to risk this just a few weeks ago:
German SPD Pushes Growth Saying Merkel’s Crisis Policy Failed
The timetable for passing the fiscal pact and associated legislation to set up the permanent bailout fund, the European Stability Mechanism, is “completely unrealistic,” Steinmeier told reporters in Berlin today. The government underestimated the mechanics of getting the two-thirds majority in parliament needed to pass the legislation and it is “very ambitious to assume” both bills pass before the summer recess, he said.
As I have stated many times in the past, politics trumps financial and economic issues in Europe. Germany’s next Federal Election is scheduled for the autumn of 2013. And it is clear that the SPD is viewing the ongoing EU Crisis as a platform with which to claim Merkel’s policies have failed (much as Francois Hollande did to Nicolas Sarkozy in France).
So, we have to consider that the SPD may in fact be willing to let Germany get an international black eye by failing to ratify the ESM legislation by its required deadline (in order to further tarnish Merkel’s image).
By the look of things, this may be the case:
German court may delay Europe’s new bailout fund
The German government and opposition reached a deal on Thursday on growth that will allow parliament to approve the euro zone’s permanent bailout scheme next week, but Germany’s top court may delay the rescue fund’s start date scheduled for July 1.
http://www.reuters.com/article/2012/06/21/us-eurozone-germany-esm-idUSBRE85K0LU20120621
Folks, this is not gloom and doom… it is reality. The mega-bailout fund which is supposed to backstop the EU doesn’t exist yet and is likely not to exist for several months as various countries legislative bodies work through the paperwork and legal ramifications.
I don’t know how else to put this, but Europe is finished. There simply is not enough capital to meet the demands (Spain alone needs €300+ billion just to recapitalize its banks). And that’s just Spain. Throw in Italy, Greece (which continues to be a blackhole for bailout funds) and France (which is going to be facing its own fiscal cliff in the near future) and it’s GAME OVER.
Months ago, I forecast that Germany will walk before it goes “all in” on the EU to prop up everyone else. I believe that day is fast approaching. Unless Angela Merkel wants to commit political suicide, she will be forced to protect Germany’s domestic issues. Whether this comes as a result of Germany pre-emptively leaving the Euro or doing so after one of the PIIGS has already left remains to be seen. But in the end, Germany WILL WALK IF IT HAS TO.
On that note I believe we have at most a month or two and possibly even as little as a few weeks to prepare for the next round of the EU Crisis.
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Good Investing!
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Previously, Graham worked as a Senior Financial Analyst covering global markets for several investment firms in the Mid-Atlantic region. He’s lived and performed research in Europe, Asia, the Middle East, and the United States.
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