Will Germany end the euro?

As stocks flirt with new recovery highs, a big decision by the German constitutional court threatens to undo the rally and the Eurozone itself.

By Anthony Mirhaydari Sep 11, 2012 4:07PM

Since European Central Bank chief Mario Draghi vowed to do whatever it took to defend the euro, risky assets have been moving higher as the risk of an outright collapse of the Eurozone faded. That trend accelerated last week after the ECB unveiled a new bond purchase program designed to push down the borrowing costs of countries that sign up for a European Union rescue package.


A big part of the reason Draghi has been successful is that he's secured the support of German political leaders. Not only does this help bolster the ECB against opposition from the German central bank (which is adamantly against further bond purchases) but it also ensures that Germany will continue to fund Europe's two bailout funds. These funds were used most recently to help backstop a weakening Spanish financial system.


That's all well and good. The problem is that we're not out of the woods yet. The German Constitutional Court will rule early Wednesday morning on whether the Eurozone's new initiatives are legal. If not, it'll be game over not only for the stock market rally, but possibly for the euro as we know it. Here's why.


The court will rule on the constitutionality of the "new" eurozone rescue fund (known as the European Stability Mechanism). Specifically, the debate focuses on the fact that Eurozone officials would have full control over disbursements from the ESM (into which Germany is the largest contributor) to countries needing bailout funding regardless of the effect the disbursements would have on the German budget.


As a result, there is a worry this undermines the sovereign rights of the German legislature. If they block it, the ESM will be stillborn since countries representing 90% of its capital must ratify it. Germany represents 27% of that capital. And only 55% of ESM capital contributors have ratified it.


Thankfully, analysts at RBS don't believe this nightmare scenario is likely. Instead, they are looking for the court to lay out the conditions necessary for Germany to contribute. Specifically, they will likely require that any new bailout disbursement get the approval of the German parliament first. Finland is the only country that requires this extra step.


If they will only require approval by the budget committee (around 40 members), markets are likely to react favorably since a small quorum could give its OK within hours. If they require the full parliament, it would be a negative since approval could take days and would be subject to a more unpredictable political outcome.


The worst possible outcome would be for the court to slam the brakes on everything until it gives a final ruling in early 2013. This would prevent the ESM from being ratified. And it would suck the wind of out this market since, without the ESM's €400 billion lending capacity, the €150 that remains in the current bailout fund wouldn't be enough for Spain let alone Italy according to the team at Capital Economics.


Thankfully, a survey of 20 top German legal experts found that all 20 believed this wouldn't happen.



For now, I remain optimistic heading into the court decision as well as the Federal Reserve decision that follows on Thursday. Current holdings in the Edge Letter Sample Portfolio include the VelocityShares 3x Silver (USLV), up nearly 80%, and Bank of Ireland (IRE), up 6.4% since I added it last week.


Disclosure: Anthony has recommended USLV and IRE to his newsletter subscribers.


Check out Anthony's investment advisory service The Edge. A two-week free trial has been extended to MSN Money readers. Click here to sign up. Contact Anthony at anthony@edgeletter.c​​​om and follow him on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.

Sep 11, 2012 5:16PM

After more than two years skating on the edge and trying to get 17 sovereign nations reach a concensus, it looks like the wealthy (Germany + other northern euro nations) might just say enough is enough. Let the euro economy reset and the wailing and gnashing of teeth from the south begin.


If  Europe brings the US economy down as well so be it. With the current congressional gridlock and Obama's incompetence to lead, the American populace will surely have to make the hard decisions now, not latter.

Sep 11, 2012 5:03PM
8 German Judges could cause the entire ESM agreement to fall apart.  That would plunge Europe and then the US into chaos.  All because governments can't stop borrowing from future generations.
Sep 11, 2012 4:53PM
As they say Tony, "wish in one hand............."   I think Germany is fed up with the lopsided nature of financial responsibilities and will respond unfavorably.
Sep 11, 2012 6:49PM
I want to see all this bail out garbage end. It doesn't fix the systemic problems.
Sep 11, 2012 7:15PM
I can only hope beyond hope that Germany will stop playing this ridicules ponzi scheme. The end of the Euro is the best thing that could happen. Let each country get their houses in order first before sucking the life out of everyone else's house. If Greece, Spain and Italy cannot create responsible budgets then they should suffer the consequences for their folly. It is not my responsibility to pay my neighbors mortgage. If you can't pay sell and move on.
Sep 11, 2012 8:02PM

If Germany is smart it will leave the Euro.  Why debase the savings of the German middle class to fund the socialist states that don't tax enough to afford their entitlement states?


The Greeks knew long ago they needed to raise taxes across the board by 60% to balance their budget.  How long can you go borrowing 60 cent of every Euro spent?


At least here we have a printing press...  But americans are too smart to stay in dollars, we buy stocks and commodities instead of debt!

Sep 12, 2012 1:34PM
"This, not to mention the fact that your history book is about a government in the 18th century printing around 50x the original base with no constraints.  There's simply no comparison.  Unless the US government decided to one day print $150 trillion in new currency and then inject it directly into the economy, bypassing the fed reserves, I'll continue to not take you, nor your book, seriously."

Andrew Dickson White wrote it and read it before members of Congress in 1876 because our economy then was resembling it. The French Revolutionary period mimicked another in France at the start of the 17th Century. In that one, John Locke, actual author of our Constitution blew it by not respecting history. Who knows who you are, a shallow thinker and believer, comes to mind. If there is one thing I've learned... burn me once- shame on you, burn me over and over using the same Inflationary methods-- shame on me. Use a tin cup when you're on that street corner, the 'ding' from the coins doubles as amusement.
Sep 11, 2012 9:25PM
All these things that we want the EU and Germany and The U.S. Fed to do in order that we can stop worrying amount to nothing more than loans of our own money.  Our own money will not be paid back to us either.  It will be used to pay government over spending.  What is worse, the governments have convinced their citizens that the evil rich people will not share with them.  Forget about working for your money, the rich people have enough to last forever. Ha Ha and the joke is on all of us.
Sep 11, 2012 8:02PM

"The stutterring euro economy is a good selling point for having a central body (FED) control monetary policy rather than each euro member political viewpoint offer up their own 2 cents. I like Ron Paul on several issues, but doing away with the FED is not one of them."


First... what economy? Second...we don't need a Federal Reserve System and banks should be fully segregated, regulated and supervised. In fact, I see no reason for any bank to cross state borders. A separate and also regulated supervised money toucher can make a business out of interstate money movement. Credit obviously should be pulled from banks because this is the umpteenth time we are forced to bail buffoonery. Germany bears the right to exist and if they have the economy to prosper, there is no reason to usurp profits to bail other failures. The GIPSI nations will need to rethink who & what they are on their own (which is the way it should be). As for all of the Inflationists who hold stocks, bonds, currencies and debt notes... you have to go... off Earth.

Sep 12, 2012 8:05AM

It's in the book- Fiat Money Inflation in France. When pressed for a judicial decision to alleviate the pressures caused by too much fiat printed currency not circulating as it should, the courts (paid by the Inflationists) gave favor to the bankers. I believe there were 2 subsequent stimuli that year and a cold winter that brought down the Bastille. They smashed the print plates just after that and began down the slope of confusion destitution then Revolution. Today's decision gave veto power. That's the Justices trying to wash their hands of the decision and step out of the way of Inflationists.


There has been zero job recover there or here and no actual economy. Wealth has grown emensely. Riches apparently bring on blindness because gun sales are off the charts as billions grow more and more hopeless of commonsense. I cannot keep telling you to read a book you already should have. 108 pages. Well written. By a reputable scholar. No theories, just History.


No elections without corrections.

Sep 12, 2012 9:52AM

"It's in the book- Fiat Money Inflation in France....."


You need to get over your book.  Even after 2 QE's, inflation is still pretty much the same as it's always been, maybe a little less, than historic levels.  The Feds can continue to stuff banks with reserves, unless we see a substantive increase in lending the expansion of the monetary base will continue to be insignificant.


This, not to mention the fact that your history book is about a government in the 18th century printing around 50x the original base with no constraints.  There's simply no comparison.  Unless the US government decided to one day print $150 trillion in new currency and then inject it directly into the economy, bypassing the fed reserves, I'll continue to not take you, nor your book, seriously.


Sep 11, 2012 5:53PM

Told ya!! Short Bank of Ireland until the German legislature writes up how they intend to lawfully contribute to the eurozone. Market will be flat to higher tomorrow for Apple's iPhone5 news but will sell off slowly after that if Bernanke stiffs us tomorrow. I really hope there is a coordinated effort by Bernanke and the Europeans to solve these problems because the religious nuts controlling our Congress will do nothing to address the budget issue in 2012.

Sep 11, 2012 6:03PM

Market will be up tomorrow on Apple news then could crash violently if Bernanke doesn't deliver. The "can't talk about my plans but trust me twins" Romney and Ryan haven't got a prayer and neither have we with a do-nothing Congress. If companies are global now why can't the U.S. Congress and ECB cooperate?

Sep 11, 2012 5:06PM
Yes. Wednesday.

American banks will be locked down and both bankers and financiers nationwide will be arrested for stealing Trillions from the nation's future and betting on Euro Debt Contracts for returns. We will need to reconcile, crush life from anyone who borrowed and holds debt contracts and cancel the elections in order to restore law, order and careers to the nation.

Why do you think I gave fair warning? Close the banks. End the Federal Reserve. Get rid of Wall Street. We will be investing 100% in job recovery whether we can afford to or not.
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