The board of the ECB divided along a mostly North/South line about whether to buy Italian and Spanish bonds. Up to now bond buying programs were to be left to individual member states. Germany still thinks that they should be.

After the US downgrade on Friday, Jean Claude Trichet became determined to take the lead role in dealing with the financial crisis. He wants to avoid a world-wide financial meltdown. So he will buy bonds in a big way.

Germany does not want an outside entity dictating its financial policies. So I’m sure we’ll hear more of this conflict in the coming days.

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By the end of last week it looked as if a new world-wide financial crisis was being fueled by the Greek debt crisis contagion that had finally spread to Italy. The Italian bonds were trading at their highest level ever in relation to German bunds. By the end of the week, European political leaders were scurrying about trying to fix things.

Berlusconi pledged to balance Italy’s budget earlier by 2013 instead of 2014.. He also introduced a balanced budget amendment for the Italian constitution. He was also going to fix the regulations that prevented much economic activity such a building a house.

Olli Rehn, the European Union economy commissioner said the countries of the Euro Zone needed to pull together fast. Even the ECB announced that they were going to buy bonds from Italy and Spain.

The mandate is there. German taxpayers are going to have to pay more to beef up the bailout fund.

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Germany must become responsible for its southern neighbors. Their debts should become its debts. And this largest economy in the 17-member European Union must also allow the bailout fund to become larger or better yet allow the ECB to perform fiscal functions. Otherwise the European Union and the euro may not survive.

Most countries can rely on their central bank as a lender of last resort. When you have a currency union like the euro, there are no individual central banks, only the ECB. This bank is prohibited by treaty from lending to individual countries. And when Trichet attempted to do a bond buy back, Germany frowned on that, too.

An emergency bailout fund has been created in place of the ECB having the authority to lend to countries. But it is not large enough. During the summit in July, it was given more authority and its cash reserves were raised, but it was agreed that the changes couldn’t go into effect unless all countries unanimously agreed upon them. In addition even if it is ratified it is still not enough. The fund should have 2.5 trillion euros to lend all provided by the German taxpayers.

Europe must stop its petty squabbling. That is why it could never get along before and why countries went to war. Germany should set a good example.

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Germany and the European Central Bank conflict over the role of the ECB. Germamy claims that the ECB is a currency union supervisor and referee. It’s role is to control interest rates and deal with other currency problems. It’s not supposed to take on a “fiscal role”. In fact, many in Germany say it’s unconstitutional to do so. A case is wending through the courts that would challenge some of the agreements Angela Merkel has already made to save the euro.

Jean-Claude Trichet, the President of the ECB, longs for a larger role. He did a bond buy back of Irish and Portuguese bonds. Last year he did Greek bonds. But he neglected to buy any Spanish or Italian bonds. The reason? The German Bundesbank opposed the idea. They think that if you give countries that much aid they will merely become lazy.

I wonder if the real reason is that German fears it will lose its independence if they allow the ECB to make policy for them.Germany wants to be in charge.

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What does it mean to be German? It wasn’t just Hitler who was hung up about such a question. The current German government is spending money to decide it. 4 million euros have been given to 5 leading universities in Germany to develop German Islamic theology programs.

Critics say that Islam doesn’t belong in Germany. They even say that it is washing away European cultural identity. Far right groups have used it as an issue to attract followers. But the current government is banking on the opinion that it not only belong there, it is there to stay. They look at the statistics that show there are 44 million Muslims in Europe, making up about 6% of the population. There are 4.3 million Muslims in Germany, mostly Turks. That figure is expected to increase to 8% by 2030.

So despite the fact that 60% of Germans say Islam doesn’t belong, Germany’s ruling class is pushing ahead. Merkel may have made a speech last fall saying that “multi-culti” had failed. But she’s trying to find a way to reverse that trend. Now that there has been a deadly terror attack in Norway against Muslims on July 22, there is even more urgency to find a way for a Turk living in the country to say, “Yes, I’m a German.”

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It’s no wonder that the recent financial crisis started in Greece, moved to Spain and Italy, and now threatens to engulf America as well. Riots of taxi cab drivers in Greece are broadcast everywhere. It was thus in 1916 when the Balkans provided the shot heard round the world with the assassination of Arch Duke Franz Ferdinand and his wife.

New strains on Spanisn and Italian bonds have caused investors to flee to safe havens: U.S. treasuries, German bunds, and U.K. gilts which just sold at their record low yield in history. The U.S. and Germany just reached a record since last November. The U.S. stock market fell for the eighth straight day, the first time since 2008.

What does this portend? Already predictions are out that Italy won’t be able to sell its bonds in September. Jokes are circulating that the EU lawmakers did only enough to get them through their August recess.

The euro crisis has at least the power to put the U.S. into another recession — and possibly much more.

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The youth of today’s south Europe has become restive. Spain has 45.7% unemployment. Greece has 38.5%. Both countries have been wracked by riots this year in protest of the austerity measures that the EU is trying to enforce.

By contrast the youth of Northern Europe has a much greater employment rate. In the Netherlands only 7.1% are unemployed. In Austria only 8.2 % are unemployed, and in Germany 9.1% are without work.

It was no mistake that Adolf Hitler emphasized youth camps and youth groups, especially for young men. He knew that the young men could cause trouble if not kept fully occupied.

If Germany allows it, the youth of southern Europe could take apart the European Union. The euro could become a currency of the past.

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In the Wall Street Journal article of Monday, August 1, 2011, “Europe’s Big Oil Sees Output Fall”, it’s easy to think of World War II. Oil was the name of the game then, too. Few people realize how important it was in the outcome of the Second World War.

Back during World War II Mussolini was making a push in Cyrenaica toward Egypt. Hitler sent troops under Rommel to support his Italian ally. Rommel could have won the war in North Africa if only Hitler had devoted more resources to it. If he had Rommel could have rolled up the British and sent them packing by the summer of 1942. Then he could have rolled up the rest of the Middle East and deprived Great Britain of oil. Without oil they would have dropped out of the war. Hitler could have won on the Western Front.

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No one in Europe would think of World War II as an enormous stimulus project. Only certain Americans would think of it that way. The current Administration is putting out statements claiming that without the stimulus of World War II, Roosevelt would have been defeated in the election of 1940 and replaced by Wendell Wilkie. He would have left office with 15% unemployment.

The truth is that World War II didn’t see so much the growth of stimulus as the growth of government. The U.S. government employed 5% of the workforce in military support roles and 11% in the military.

This was Adolf Hitler’s kind of thinking — socialism. Let the federal government do it. Very ironic.

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Wolfgang Schauble has a new challenge on his plate. Italy and Spain may not be able to participate in the next bailout payment to Greece in September, the one due under the first bailout plan that was agreed upon in 2010. Why not? Italy and Spain have been forced to sell their sovereign debt at a higher interest rate. So Schauble has to work out a system whereby those two countries don’t have to pay anything this time around. In other words, he will let them opt out.

This could set a dangerous precedent. If the third and fourth largest economies in Europe are allowed to opt out of a bailout plan, that might leave Germany and France holding the bag. Schauble certainly doesn’t want that! All those irate German taxpayers would decide they wanted a different government with a new Chancellor instead of Angela Merkel. And Merkel would certainly hold her Finance Minister responsible for such a fall from grace.

Perhaps Schauble should suggest that the European bailout fund take care of the deficit. The only problem with that is that it is a very new thing. IT’s not fully set up yet. And who knows about its funding and where it comes from. Nobody, not even Schauble, can say whether it can make the 5.,8 billion euro payment to Greece in September.

But he is a brilliant Finance Minister. We are sure he can come up with something original that the German taxpayer will buy and at the same time will let Germany off the hook for giving Greece an outright sum of money that doesn’t have to be paid back.

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