Before the ink is dry on the agreement about the Greek bailout, Germany faces a new challenge to its fiscal union with the rest of Europe. In a Saturday, June 18, 2011 article in the Wall Street Journal, “Moody’s Warns Italy On Economy”, the rating company announces that it is about to downgrade the Italian credit rating from Aa2, its third highest score, to an unspecified number. It cites a weak economy and rising interest rates. Moodys says that investors don’t want to invest in highly indebted countries that aren’t growing.

But Italy, unlike Greece, is not a Balkan country. It’s not on the fringe of Europe. It isn’t threatening to leave the Euro Zone and quit the euro as its currency, the way many in Greece are. Italy’s at the very heart of Europe. It’s the origin of modern Europe, the seat of the former Roman Empire and the present seat of the Vatican. It wouldn’t drop out of the EU no matter what. And unlike hotheads in Greece, Italians are used to German jokes about them. If they could survive World War II as the only major country to be on both sides, they certainly aren’t going to be concerned about a mere fiscal crisis.

Italy presents the risk to the Germans of seeing their own currency degraded by default. But Italy would probably be their last partner in the fiscal union even if every other country fled. After all, Hitler depended upon Mussolini.

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Hitler

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Mussolini

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Merkel engaged in an act of statesmanship on Friday when she decided that she would set aside objections on the part of German voters and try to preserve the euro as the currency for all of Europe. She would back the ECB-French initiative to hammer out an gentlemen’s agreement for Greek debt financing modeled after the 2009 Vienna Accords when banks agreed to continue loans in Eastern Europe during the financial crisis. It will be a hard sell back home, but she is popular and can probably pull it off. After all, Germany had a very prosperous year last year and continues prosperous this year. They just have to spread it around all over the continent. This has been reported in the Saturday edition of the Wall Street Journal, “Greek Crisis Eases For Now” with a dateline both in Berlin and Athens and a picture of Merkel and Sarkozy.

Merkel is probably looking to build a legacy for herself when she is out of office. Maybe it will make her slightly unpopular this year, but she is making decisions for the ages and the history books. After all, didn’t she say earlier this year that the euro was “Germany’s destiny”?

But how successful Merkel is depends on the execution. On Sunday and Monday the European Finance ministers must meet in a group in Luxembourg. Jean-Claude Juncker’s group must hammer out the exact language of what is being agreed to. Because then on June 24 Merkel and Sarkozy must sign it into law. Maybe they will even take another walk. Anything that would look good in a history book! Drama will probably help voters accept it, too.

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Merkel and Sarkozy

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Merkel caved today, agreeing to go along with the European Central Bank’s “gentlemen’s agreement” instead of insisting on restructuring of the Greek debt. But she did so not after listening to the Greek Prime Minister’s eloquent speech. He said, “We are at a critical moment. Ether Europe will write history, or history will write off the European Union.” Instead she paid attention to Alan Greenspan’s calculations of almost certain default if she didn’t compromise. She didn’t want to start a financial collapse in the EU.

As it is, it may still be too late. The Greek Prime Minister has a majority of only 5 seats. He just got rid of his Finance Minister and appointed Evangelos Venizelos. A vote of confidence is scheduled for Tuesday. If his Socialist government doesn’t survive, the new government may drop out of the EU anyway.

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Alan Greenspan

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Germany stands firm. Shock waves ripple through Europe. The Greek government is about ready to fall. Greek Prime Minister Papandreou has agreed to resign if the other side agrees to adopt an austerity measure. They didn’t take him up on his offer.

The Greek Prime Minister says he will call for a vote of confidence in Parliament. He will reorganize the government. The Finance Minister, George Papaconstantinou, will lose his job.

As a result, the stock market sank. Everyone fears contagion. The euro plunged 1.9% against the dollar. Moody’s will downgrade French banks because of their exposure to Greek debt.

Who will prevail? Wolfgang Schauble, the German Finance Minister, who shakes his fist at the Greeks who refuse to adopt austerity measures, or the mobs inAthens? They battle the police.

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Greek riots

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Germany holds all the cards when it comes to the Greek debt crisis and the expansion of the euro to the Balkan country, Greece. And they are not saying what Merkel will do when she goes to the summit meeting of EU leaders on June 24 in Brussels. Tensions and suspense build. Before the summit there was supposed to be an agreement on new aid for Greece. Leaders like Merkel were just supposed to ratify it.

Wolfgang Schauble, the German Finance Minister under Merkel, is still shaking his fist at the two Jean-Claudes, Jean-Claude Juncker and Jean-Claude Trichet along with Mario Draghi, the next in line to become head of the European Central Bank. Schauble wants the bond holders to openly share some of the losses along with German taxpayers. The Jean-Claudes want a “gentlemen’s agreement”. They don’t want anything on paper but behind the scenes they expect the bond holders to share the losses, keep their mouths shut, and continue to buy the new Greek bonds.

The last chance to come to an agreement before the summit on June 24 is on Monday, June 20 when the Euro-Zone finance ministers are scheduled to meet.

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Wolfgang Schauble

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Germany’s dream of expanding its euro empire took a new hit on Monday. In the Wall Street Journal article, “Greek Debt Hits New Low Monday”, we learn that Standard & Poors cut Greece’s debt rating by 3 notches. It was lowered from B to CCC, oine notch lower than Moody’s CC. This makes Greece the lowest rated country in the SSP index. It’s now lower than Jamaica, Pakistan, and Figi. It’s below Argentina and Equador, wihch have both recently defaulted on loans. The Congo might be worse, but certain countries aren’t rated at all. The chance of default for Greece is put at 74% over the next 5 years.

The bond rating has been lowered in response to Germany’s position that Greek bond holders should share the losses and not just the German taxpayer. This is the position opposed by Jean-Claude Juncker and the European Central Bank.

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Germany’s dream of expanding its euro empire took a new hit on Monday. In the Wall Street Journal article, “Greek Debt Hits New Low Monday”, we learn that Standard & Poors cut Greece’s debt rating by 3 notches. It was lowered from B to CCC, oine notch lower than Moody’s CC. This makes Greece the lowest rated country in the SSP index. It’s now lower than Jamaica, Pakistan, and Figi. It’s below Argentina and Equador, wihch have both recently defaulted on loans. The Congo might be worse, but certain countries aren’t rated at all. The chance of default for Greece is put at 74% over the next 5 years.

The bond rating has been lowered in response to Germany’s position that Greek bond holders should share the losses and not just the German taxpayer. This is the position opposed by Jean-Claude Juncker and the European Central Bank.

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Greek riots at the Parthenon

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Whoever said we are now all national socialists knew what he was talking about. No, I don’t mean the political philosophy of dictatorship. But I do mean the economics of a crade to grave socialist state.

According to a Monday, June 13, 2011 article in the Wall Street Journal, “Europeans Found Taxed Heaviest: Russia Rich Have Lightest Load”, national socialism is still alive and kicking in Western Europe sixty-six years after the end of World War II in 1945. Italy supposedly has the highest tax rate, but no one pays taxes in Italy. Germany is number 2, which means they’re really number one. A citizen earning the equivalent of $200,000.00/year in Germany keeps only 56% of what he earns. That means he pays nearly $100,000.00 in taxes! In the U.S. a similar person keeps 69.9% and in Britain 60.9%.

Hitler would have been comfortable with such statistics.

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Adolf Hitler

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In an article from the Wall Street Journal on Saturday, June 11, “Gates Questions NATO’s Future”, Gates makes a speech in Brussels decrying that the U. S. provides 75% of the funding for NATO. The Europeans don’t shoulder their part of the burden. The U.S. has doubled its defense spending since 2001. In Europe it has fallen by 15%. He even accuses the countries on the Continent of trying to get a free ride.

He complains about the Netherlands, Spain, Poland, and Turkey by name. He never mentions Germany under Merkel, no doubt because that’s what he’s really talking about and it wouldn’t be politically correct. Of all the nations in NATO, next to the U.S. itself, Germany has the biggest economy and could shoulder the biggest burden.

Gates alludes to countries in Europe that spend all their money on a “cradle to grave” social welfare system instead of spending money on defense. The Germans were the ones who invented the socialist welfare state. It’s been there during many administrations and changes of government from Bismarck to the Kaiser to Hitler himself. (Remember that Nazi is a slang word. The real term for Hitler’s party was National Socialist).

I wouldn’t be surprised if the system was taking shape back during the time of Frederick the Great. Remember, this is the land where socialism actually works unlike Anglo countries such as Britain and the United States. When they complain about national health care they come up with failing examples from Canada, France, and England. They never mention Gemrany.

Bismarck, the Kaiser, Frederick the Great, and Hitler were all leaders who started wars, all leaders who depended on Germany’s Prussian military establishment where they invented the modern idea of the standing army. You notice that socialism in those days didn’t prevent Germany from engaging in massive military build ups such as the one that Hitler was supervising in the 1930’s. First Hitler got the capitalist economy back on track. Then he signed a Naval Treaty with Great Britain, and the rest was history.

Historically Germany can do both at the same time as you would expect, but they lost the will to do so after they were defeated in World War II. What’s curious is that the U.S. expects Germany to be defeated but somehow not to care. Just because the Americans have discovered that they can’t manage Europe without Germany’s cooperation doesn’t change the situation.

They are competing with us on the economic front by inventing the euro and building up the second biggest economy in the western world. But Germany’s Prussian miltary tradition is in abeyance within living memory of the last war when they were firebombed and invaded. Only after waiting forty-five years did they finally manage to reunify East and West Germany.

The fallacy for Americans, I think, is to under rate what World War I and World War II meant for Europeans, especially Germans. Henry Kissenger had it right, not Gates, when he said that leaders on the Continent can’t ask for sacrifice. The people adamantly refuse after losing so much to war.

It is now up to the United States and the United States alone to bear the military burdens of defending the free world. When Gates was silly enough to warn that the “U.S. won’t underwrite the defense of Europe forever”, he was making a fool of himself. Of course they will as long as they carry the mantle that they got in 1945. To throw off that mantle — remember it was England losing the mantle that enabled World War I and II to take place to begin with — would surely mean World War III.

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Angela Merkel, Chancellor of Germany

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Adolf Hitler, Chancellor of Germany

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Kaiser Wilhelm II

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Otto von Bismarck

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World War I images

The Western Front has a new war, the one between German’s Finance Minister, Wolfgang Schauble, and the Head of the European Central Bank, Jean-Claude Trichet and his minions, which includes a German by the name of Stark. Everyday there is a new assault. One side fires a volley at the other, the other fires back, and everyone takes refuge in their long-held positions in the trenches from which they don’t plan to budge any time in the foreseeable future.

It is three years shy of the 100th anniversary of World War I, the First World War, or the Great War. This is no way to celebrate the men who laid down their lives with useless slaughter so their troops could advance a few yards in the mud or at best hold onto their entrenches positions. The European Union was created in the aftermath of World War II, the Second World War. The member sates ought to value it enough to make sacrifices to keep it together.

Instead Germany’s lower house of Parliament approved a non binding motion to support further “tranches”. They will continue to support the current 110 billion euro package of 2010 and the new aid package for the next two years only if the IMF assistance is assured and only if there is adequate participation by private investors.

On the other hand, Jean-Claude Trichet’s minion, Stark, said, “The ECB can’t compromise without threatening its credibillity.” He claims that if the Germans have their way, the Greek banking system will be crippled.

It doesn’t help that if you listen carefully you discover that Jean-Claude Trichet and Wolfgang Schauble really don’t disagree with each other at heart. They both think that the Greeks can’t pay back their debts and that default of some sort is inevitable. The only disagreement is about a smoke and mirrors arrangement of the ECB called the “gentlemen’s agreement” or the “Vienna Accords”. The Germans insist that everything be on the table. The ECB wants everything hidden from view. According to Trichet, it’s OK if the private banks buy more bonds from the Greeks with a new, longer term maturity. But they must do it voluntarily and without signing anything first. This implies a lot of jawboning behind the scenes, arm twisting out of public view, a lot of what Americans would call “political intrigue”.

The ECB should consider if this sort of trench warfare that doesn’t accomplish anything is really appropriate for the twenty-first century. After all, this was how the twentieth century began in the most inauspicious fashion in history. After all, we don’t want those Vienna Accords to become another Treaty of Versailles.

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