German Chancellor Angela Merkel does not believe in printing money. She is against loose financial policies sought by the politicians of less disciplined and/or less fortunate euro nations. She would be very foolish to agree to Germany's participation in open ended so-called "joint euro-bonds" or to trillions of euros worth of bank deposit guarantees.
The threat of joint liability, in any form, is ominous, and would have a catastrophic effect on Germany that would survive the collapse of the euro currency. If Germany guaranteed the bonds of less disciplined euro nations, and those nations refuse to change their ways (more than likely), Germany will get walloped. When the euro experiment ends, Germany's euro based obligations will be re-denominated in the new mark. If those obligations end up including those of the rest of Europe, the German taxpayers and industries will eventually need to pay them in marks, dragging down the German economy for decades to come.
But, there is another way. German policy-makers are also currently against granting a banking charter to the ESFS and/or ESM bailout funds. Without a charter, the bailout funds are limited to using a limited amount of money euro nations, including Germany, are willing to commit. This amounts to about 500 billion euros. With a charter, the bailout fund could exchange debt for cash at the ECB. A sequential process of buying, submitting as collateral for cash, buying more debt, re-submitting as collateral for cash, etc. would buy a great deal of time for the eurozone.
The real issue is one of monetary debasement. The Germans are right to be against it. As a matter of principle, it is wrong. German policy-makers have the collective memory of Weimar hyperinflation. They rightfully hesitate to agree to money printing of any kind. Yet, there are only two ways to keep the euro going for a few more years. One is joint liability. The other is money printing. In the absence of one or the other, the weak links are going to break off, and the euro is going to die in an uncontrolled death.
Let's say Germany chooses joint liability. Assume that peripheral Europe continues its profligate ways, refusing to carry out anything other than "lip service" reforms (likely). Assume that Italy, Greece, and others use joint guarantees as a way to offload responsibility onto the solvent areas of Europe. When the euro collapses, Germany's debt will be re-denominated into marks, and stuck with the bill for decades to come.
But, let's say Germany refuses joint bonds and/or joint bank deposit guarantees. Instead, it agrees to granting the ESM bailout fund a bank charter. It will be nothing more than a shareholder in the ESM, essentially a corporate entity. Like any shareholder, its legacy liability is limited to what it put in. If the ESM facilitates massive backdoor money printing, and causes an inflationary holocaust that forces Germany to withdraw, Germany will be on the hook for the mark equivalent of its euro-denominated "at-risk" ESM money.
In an ESM-facilitated money-printing scenario, the ECB will be on the hook for the amount above what Germany has put at risk. In a euro collapse scenario, the euro will either cease to exist or it will become a currency worth much less than it is today. As soon as Germany sees the handwriting on the wall, well in advance of the hyperinflation, it could return to the mark. It could protect its own industries and people by denominating German-owned debt into marks. At the same time, it could pay off euro denominated debt to other nations, in a very deliberate manner, by converting valuable marks into cheap euros.
The new mark will be managed by either the Bundesbank, or if the old German central bank is considered to be too intimately connected with the former ECB, a new German central bank can be chartered, called something else, and dedicated to managing the new mark. The new central bank might share all the former Bundesbank facilities and employees, but remain free of ECB connected debt, preserving the integrity of the new mark.
Germany has no good choices. The logical choice, however, is to agree to grant a banking charter to the ESM. If peripheral Europe keeps its word and becomes thrifty, the common currency will be saved. In that event, the increase in the money supply can slowly be reversed. If, however, as is much more likely, the ESM is used to monetize irresponsible spending, Germany will have a less onerous way out.
I believe that German policy makers will eventually realize that their interest lies in allowing euros to be printed, either this weekend, or a few months from now. But, whenever the realization comes, sooner or later, Germany and the other northern euro nations will have no choice but to do something. If they don't do something, the euro will end abruptly in a disorderly manner. That will plunge Germany, Netherlands and Finland into disarray with their neighbors.
This analysis sounds Machiavellian, and it is. If Germany does what I think it will eventually do, the foolishness of long-term oriented bond buyers will lead them, like lambs to the slaughter, into European sovereign debt. Bond buyers, having their investments temporarily juiced by newly printed euros, will eventually lose everything if they don't get rid of the bonds in time. That is not much different than what is going to happen to buyers of Treasuries in America.
Obviously, no one in power is going to admit that this type of planning can or will happen. But, every policy maker in Europe, Germany, and even America has been concentrating on survival. The practical short- to medium-term effect of massive back-door monetization of European debt by the ESM will be appreciation of precious metals and stock investments. European bonds are likely to appreciate dramatically in the short to medium run. American treasuries are likely to collapse as safe-haven demand is pulled out from under them. Capital now hiding in the U.S. will flow back to Europe. That will deprive the U.S. economy of capital, spurring Mr. Bernanke & Co. into another misguided attempt to print new capital.
It is, of course, possible that German policy makers will do the "righteous" thing, continue to refuse to allow printing, and stay the present course. Our experience with American policy-makers, and politicians of all stripes on both sides of the Atlantic, is that they won't. They will compromise as I have outlined above. If they do stand on ceremony, "safe haven" non-euro currencies and bonds, like the Swiss franc, Japanese yen, and U.S. dollar, are going to appreciate somewhat more in the short term.
One big problem is that Japan and the U.S. are not really safe havens. Their debt problems exceed those of Europe. Switzerland is not completely safe either. Its small central bank has been massively intervening in the currency markets, and will take a huge hit on hundreds of billions of soon-to-be deeply depreciated euros. The franc is going to suffer from that.
Assuming that nothing is done, and the euro does collapse, stock indexes, like the Dow Jones Industrial Average (DIA) and the S&P 500 (SPY) will dramatically fall, as European banks sell off everything they own. The CAC, DAX and FTSE are likely to fall even more. The only good longer-term investment will be precious metals, especially gold (GLD) (IAU) (PHYS), as people lose faith in all fiat currencies.