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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Merkel’s coalition seems to be breaking up over the second Greek bailout deal. It has caused a rebellion in her own coalition. Twenty-five lawmakers have gone on recording saying they won’t support the bailout changes. Even worse, during a Monday mock vote, backbenchers from the Christian Democrats and from the Free Democrats didn’t vote for Merkel’s plan.

Merkel has until September 29 when the measure comes up for a formal vote in Parliament. They are voting on whether to make the EU bailout fund bigger and more flexible.

The opposition supports Merkel, but if she passes the measure that way she will look incompetent, and her government’s days are numbered.

The message is clear. Germany doesn’t want to bail out its neighbors.

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It’s supposedly been two years since we left the last recession 2008, though many of us never noticed the recovery. But now chances are likely that we are entering another one. This time instead of being sparked by Lehmann Brothers, it will be sparked by the Euro Zone bond crisis — in other words the Greek debt woes.

A story that was supposedly boring and peripheral omly a few months ago, has turned into epic-making news.No one would have imagined last spring that the Greek debt crisis would mushroom into the next recession.

But Greece symbolizes what’s wrong with everybody else? The western industrialized democracies have too high a rate of public spending and too high a rate of private debt. More debt needs to be shed. If we don’t figure out a way to shed it effectively, it will get shed the hard way — meaning a downturn.

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They say that Berlusconi is under fire for not putting through his austerity program. They talk about Italy’ huge sovereign debt and reveal that its debt is 120% of its GDP. Italy’s 10-year ond may have just raised its yield to 5.23%, .23% wider than the benchmark German bundt. But what else does anybody expect of Italy? It sounds rather like an Italian opera. We wait for the fat lady to sing.

Germans and other Europeans have made jokes about the Italians for a long, long time. Italians are familiar and fit like an old, comfortable shoe. There is no possible talk of Italy, no matter what happens, dropping out of the EU. Italy is the heart of Europe historically and related to all the other countries as a sort of Mother Country. In addition, it’s a comfortable beach resort for the rest of Europe and a great place to go for food and high culture.

That said, Greece is just the opposite. Greece was occupies by the Turks for centuries. It’s a place where East Meets West. As such you can expect lots of violent clashes and protests. It’s a Balkan state. Another Balkan state, Serbia, kicked off World War I. Greece could very possibly drop out of the EU and create a crisis, whose ripples and waves would be felt around the world.

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Christine Lagarde, the new IMF chief, says that European growth is being hampered by too much sovereign debt. She thinks that there has been a “crisis of confidence”, and industrialized nations must work together. Cutting back of course stimulates growth, but there is only so much cutting back that countries, especially certain countries, can tolerate.

Greece, in particular doesn’t seem to be able to tolerate much more. Just because Lagarde says Germany austerity programs are “doing fine” in Germany doesn’t matter. Germany isn’t Greece.

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The interest rate for Greek 1-year paper is 70%. 2-year paper is 50%. Talks between the Greek government and the Troika, the IMF, the ECB, and the EC, European Commission, have been called off. The Greek government says it’s numbers are getting worse because of the recession. The Troika says it’s only partly because of the recession. The Greeks are not carrying out the austerity program. They are not selling government assets.

As a result 8 billion euros needed to continue the first Greek bailout in September are not being handed out. The Greek government can’t pay it’s debts without the loan, and it needs it before September 30.

A senior IMF economist says there could be a default this month. I’m inclined to agree, especially if the German Constitutional Court rules on Wednesday that Merkel’s July agreement about the second Greek bailout is unconstitutional.

Greece could default not only this month but this week.

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The Greeks are likely to miss their budget deficit goals in 2011. Their deficit could exceed 8% of GDP. Tax collection is the biggest problem. People don’t have enough money to pay taxes.

The reason? In more western countries, particularly Germany, cutting the budget stimulates the economy and creates jobs. This is because there is a larger private sector to begin with. In Greece most jobs are public sector jobs. Therefore cutting them and cutting back on pay only harms the economy.

The German austerity system doesn’t work here and will derail future prospects for the EU.

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