The U.S. Treasury Secretary has castigated the Europeans at a conference in Wroclaw, Poland. He says they ought to get it together and increase the size of their bailout fund. Otherwise it can’t handle the job of bailing out Greece and potentially Italy.

But what the U.S.A. doesn’t understand is that the Euro Zone is not the United States of Europe. The 17 member countries are not like states in the U.S.A. There is no one central political and economic authority that can make policy. Germany is nearing the end of its patience with Greece. Most Germans won’t support increasing the bailout fund and paying additional taxes. They don’t feel any affinity with the Greeks.

Remember that Europe is still operating in the shadow of World War II. That’s all that needs to be said.

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Supposedly this week for the first time ever European heads of state and officials are considering issuing Euro Bonds. They’re promoting it as a way to lower borrowing costs for most of the members of the EU. But it will never happen.

Historically no country like Germany that is one of the four big economies of the world will take a voluntary downgrade to be a do-gooder for the other Euro Zone members. It will not stop issuing bunds, which is the safe haven investment of Europe, just so Greece can have lower borrowing costs — for a time. Naturally if Germany kept it up and sacrificed its economy for the common good, in the long run it would harm everybody. There would no safe haven. It’s economy would lose momentum, and everybody in Europe would need bailed out.

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European companies are turning to America for loans as the Greek credit crisis deepens. The French bank, Societe General, had its credit rating downgraded to AA3 with a negative outlook because it was embroiled with Greek loans. BP, British Petroleum, and mid-size companies are avoiding France because of the crisis.

U.S. banks have much cash to loan out. Up until now they haven’t been making many loans because of the 2008 meltdown. Even the ECB is pumping dollars into the Euro Zone.
This is all reminiscent of the end of World War II. Europe looked to America to turn it into the United States of Europe. That was the new model for the world. Apparently they are still looking towards us to set the mess straight.

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Germany doesn’t like Greece to be unpredictable. Merkel said that was one reason why they couldn’t allow Greece to have a messy default. It couldn’t be controlled and no one would know what would happen. It might start a dangerous domino effect and cause an unravelling of the euro. Not only Greece would default but other countries such as Portugal, Ireland, Spain, and maybe even Italy. So it’s up to the Euro Zone to work with Greece to prevent the first default.

Merkel even rebuked her Finance Minister, Wolfgang Schauble, for saying that maybe they should let Greece go. She also disagreed with the Free Democrats who said they ought to start an insolvency procedure for Greece. Needless to say she rejected the ideas of the Conservative Bavarian Party that insisted Greece be thrown out of the Euro Zone.

Merkel thinks that unity, not disunity, is the key to advancing Germany’s interests.

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Really the euro is supposed to be the German deutsche mark. Investors have treated it that way. That’s why it’s worth so much. It’s like the British pound sterling. That’s why the rest of Europe has to conform to German currency standards to maintain the currency union. Otherwise, it won’t work.

European investors flooded into German bunds on Monday as reaction to Greece’s coming default. European banks cut back lending to Greece despite the announcement over the weekend of a new property tax in Greece to be collected with electric bills. Investors didn’t need to look further than Greek tax collectors and customs officials going on strike on Monday to lose confidence in the new tax.

German bunds hit new lows, 1.72% for 10 year bonds. It will only get worse as Greece gets closer to default.

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Wolfgang Schauble’s deputy, Jorg Asmussen, has been appointed to succeed Stark on the ECB executive board. This nominee has not spoken out publicly on the issue of ECB bond buying. And since his appointment has to be endorsed by the Euro Zone Finance Ministers and heads of state, the European Parliament, and the ECB itself, he probably won’t. But if we are to speculate, we can deduce that he probably doesn’t like the expansion of the ECB role within the EU. For one thing, Wolfgang Schuable’s views are well known. Jorg Asmussen’s predecessor’s views are well known as are the views of most Germans. In addition he serves in a conservative administration, that of Angela Merkel.

The German view on such matters is critical. The EU can’t survive without German cooperation.

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Most investors think of the euro as the old German deutsche mark. That’s why it’s worth so much against other currencies. Thus it follows that the same investors assume that the ECB is the old Bundesbank.

That’s apparently what Stark thought, too, before he resigned from five years of being the EU Central Bank Executive Board’s German member and enforcer of Bundesbank teachings about inflation and financial stability.

This thinking is so pervasive with most Germans that it doesn’t matter what your political allegiance is, whether you are Communist or Nazi, you are conservative about economics. There is a rumor being reported that Germans are printing Deutsche marks to keep on hand when they pull out of the euro.

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Saturday, September 10, ’11: Germans Are Turning Sour On Currency Union

Jurgen Stark quit his job on the ECB board effective Friday. He was the member representing Germany. Like many people in that land he doesn’t approve of the central bank’s expanding role in the EU economy. During his tenure there he was the ECB’s most skeptical voice about buying up Greek, Portuguese, and Italian bonds.

His resignation jolted the markets both in Europe and the United States. It caused the euro’s biggest one day drop in two months down to $1.36, the lowest since February.

You might object that Jurgen Stark is just one man. But investors fear he represents the mood of Germany. And without Germany the ECB couldn’t survive.

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World War I was the last time the Arabs and Turks could be split on the issue of what European power they supported. In the Great War Lawrence of Arabia led the Arab Revolt, helping the Arabs win their independence against the Turks who fought on the side of the Germans. After the War To End All Wars the British promulgated the Balfour Declaration in 1919. They declared their support of Zionism. Ever since then the Arab joined the Turks in supporting the Germans. The Mufti of Jerusalem supported the Nazis during World War II and insisted that Hitler not send the Jews being chased out of Germany to Palestine. Hitler acceded to the Mufti’s wishes.

That is why you might find up to 1000 Islamic terrorists hiding in Germany right now. They don’t plan to blow up anything there. They plan to use the country as a launching ground against Britain or the United States.

On Thursday in Berlin authorities arrested two suspects and seized a trove of chemicals. They searched the mosque One was a twenty-four-year-old German of Libyan descent and the other was a former resident of the Gaza, in other words a Palestinian.

Germany’s Interior Minister, Hans-Peter Friedrich fears that they might have been planning something for the tenth anniversary of 9/11.

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People thought it was up to Angela Merkel whether the EU would continue. Now the German Constitutional Court has decided that it’s up to Parliament. Not the full Parliament as it turns out, but the Budget Committee. From now on all decisions about bailouts must be OK’ed by them before the Chancellor can agree to them.

This lessens Angela Merkels perceived leadership role in the EU. But doesn’t lessen it to the point that putting decisions about bailouts to a full Parliament vote would. It clearly signals that a large block of the electorate in Germany disapproves of the Greek bailout and improving the EU bailout fund to aid them. They don’t want to write a blank check to Balkan countries.

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