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Something extraordinary, if not surprising, happened overnight in Europe. Both Sarkozy and Merkel spoke, separately, of increased authority of the currency union based on a new treaty. This implies, of course, the erosion of sovereignty of the other member states. This must have had UK watching with great apprehension, US with furled brows, and the ears perking up on geopolitical junkies all over the world.

A brief history may be in order. Historically, the UK has always viewed France as the source of geopolitical pressure from the European continent. Therefore, the rise of Bismarck, Germany, in the late 19th century was welcomed by Britain. This ought to keep the pesky French busy, they thought. But both the rise of Germany and decline of France were faster than the British had prepared for. Germany quickly became the face of the continental pressure, and France became a stepping stone, however unwillingly.

To be sure, "Merkozy" is only talking about partial centralization of fiscal authority so far. But nobody had talked about this when the euro was first introduced; instead, everyone emphatically assured everyone of complete sovereignty and dismissed any notion of centralized governance with theatrical indignation. As problems surfaced, a bit of centralization became necessary -- but no worries, just a little bit, relax, trust me.

But if we now agree a currency union cannot stand without a political union, how can anyone believe the centralization will stop with the fiscal policy? A little bit here, a little bit there, before you know it, we have a Franco-Germany Empire (though of course it won't be called that).

At least that's the only way to save the euro. Too bad it'll either never happen or cause a geopolitical earthquake on a global scale.

  • There's a deep historical and cultural divide between Germany and France.
  • Germany is the de facto "more equal" partner, but France will not stand for it.
  • The current Anglo-Saxon Empire will view this as a grave, long-term strategic threat. The euro had come close to threatening the dollar's reserve status just before the trouble surfaced. If it morphs into a Franco-German Empire, it would become a more concrete threat since not only the euro is on more solid and sustainable footing, but also it's a major new geopolitical force to be reckoned with. No conspiracy theory needed, but there will be many forces trying to sabotage it through a million levers.
  • The little ones will haggle and hustle throughout the process, making the process painfully slow and with many twists and turns. The big two cannot brush them aside until it's done.
  • Once the Franco-German Empire takes shape, an alliance with Russia is the natural next step. I know, they hate each other just as much as everybody hates everybody else in Europe. But the pressure from the Anglo-Saxon world would make it the less resentful alternative. And then, if China silently supports it, the Franco-German-Russian-Chinese alliance actually has a chance to go on in the face of declining Anglo-Saxon Empire. When the time is convenient, Japan will no doubt reclaim their long-lost yet long-sought-after independence. In fact, there's a natural common theme for the New Axis: they all want strategic independence from the US. And you thought we'll never have a big war ever again.

This is the kind of stuff that goes into history e-books for future generations. And people fret over Iran or the VIX over 30 as if it's a big thing.

No, I'm not predicting war. But if you think war is impossible, you're delusional. The US has been perfecting the art of conventional warfare without triggering the nuclear threshold. And other countries haven't gone to sleep, either. There are deeply rooted, long-running reasons why France has relentlessly pursued its strategic independence from US; Germany rose quickly before WWI, again before WWII, and again recently; Russia and China simply refuse to join the Anglo-Saxon Empire no matter what. I don't think the resolution has to be war. But a financial/economic confrontation can be quite painful and damaging in this day and age. Just try to imagine (put your thumb on the 911 call button -- now -- ready?) driving without GPS. There.

Looking at the more immediate future, the Brussels Summit on 12/8-12/9 carries so much hope that it has to disappoint. Europeans are masters of treaties. They've produced on average more than one major international treaties per year since 19th century. The carefully thought-out ones take years to finish and last five years. The hastily drawn ones last months. Pick your poison.

Unless the market has a major pull-back before Dec. 8, I'd open a small, speculative short position, and either add to or close it quickly after the announcement. In other words, the risk is heavily biased on the downside before the summit.

On a longer time horizon, if the fiscal union appears more realistic after the summit, the current rally may continue on a bit and the world might even stop obsessing over Europe for awhile. But, as discussed above, the euro problem will come back one way or the other. Fed has acted to save ourselves by saving Europeans, twice (2008 and the recent coordinated currency swap lines), after being hijacked by over-leveraged European banks. It will have to do this again, except that it's unlikely to work again as the market gradually see the distinction between a liquidity crisis and a solvency one.

Source: The Dawn Of The Franco-German Empire