Outside the Box

What Will Germany Do?

John Mauldin

June 26, 2012

This week all eyes are on Germany, and the question is "What will Germany do?" We are going to look at four quite-short essays. Two are from GaveKal, one is from Dennis Gartman, and the last is from Kiron Sarkar – all on this very topic.

One of the reasons I really like to read the research from GaveKal is that they are very public when their analysts disagree, and you get to listen to the back and forth. Some of the best analysis I see is when Charles and Louis Gave (father and son) and Anatole Kaletsky do email battle with each other while they are on three different continents. This time it is Anatole and one of their analysts, Francois Chauchat (whom I have not had the pleasure of meeting), differing on whether Germany should (or even can!) leave the eurozone.

I should note that it is not unusual for there to be intense debates in serious research houses. Happens every day, and perhaps often during the day. When you are playing an "A"-level game at one of the best research houses, you are typically not a shy, retiring type. What is less than usual is for that debate to be played out in public for clients to see. While a strong, useful consensus may be reached, I find the sturm and drang of the debate to ofttimes be just as instructive.

Anatole thinks Germany should leave, and you find yourself nodding your head, and then you read Francois and you sit back. This is a very complicated issue.

I continue to believe that Europe in general and Germany in particular have no good choices. They can only choose between Disaster A, which is keeping the eurozone together, and Disaster B, which is breaking the eurozone apart. Either will cost trillions of euros and mean much pain. It is not a choice of pain or no pain. It is simply a decision as to what type of pain you want and in what doses you want to take it. Choose wisely.

Then Dennis Gartman weighs in this morning. For those who know Dennis, he is never shy about voicing his opinions when he writes every market day at 3 AM Eastern Time, from wherever in the world he is. But he is not married to any positions. His favorite quote seems to be from Keynes, which is (loosely), "When the facts change then so do my opinions." And then he tells everyone about the change and why. You have to love that.

But this morning he was exceptionally strong in his opening piece about Europe and Germany. After reading the notes from GaveKal, absorb Dennis's pithy analysis.

And finally there is a one-page summary note from Kiron Sarkar, which he sent me while we were exchanging emails today. (With m on my iPad 3 in Tuscany. There is an Italian company that sells a SIM card for the iPad that gives unlimited monthly data for €20. Awesome! Pay attention, AT&T).

This is a real feast for those who love to think about what's behind the headlines. I love it.

As noted above, I am back in the village of Trequanda in Tuscany. I do so love this place. Such peace and such views. Real, meaty food for the soul, while your body gets amazing Italian cuisine! The first of our guests arrived today, and the conversation while dining al fresco, gazing over the Tuscan hills soaking up the sunset, was so fascinating. My version of relaxing and recharging, even if it was with a nonalcoholic beer (sigh!).

Have a great week; I know I will. I see lots of fresh tomatoes and mozzarella in my immediate future. And lots of great conversations and time to read and think.

Your wondering why I only booked two weeks analyst,

John Mauldin, Editor
Outside the Box

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It May Be Time To Say "Auf Wiedersehen"

By Anatole Kaletsky

Now that the Greek election is over, with the pro-bailout parties gaining enough seats for a slim majority, Europe can return to the regular cycle of panic, relief, disappointment and renewed panic, that we have observed for the past two years. This time, however, the relief rally may be even shorter than usual, since the market's attention will soon shift from…

Discuss This

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Page 1 of 2  1 2 > 

Helene Villemure

June 30, 2012, 5:42 p.m.

Well I have to agree with Mr Chauchat, but I would add that 16 wrongs do not make a right, and that Europe without Germany may feel cozy and good to the “latin” countries, but will not solve the problems they created for themselves with spending more than they create, or can create wealth.
Treating Germany like the bad guy and outlier is all nice and fine (and easy) on a political standpoint, but the moral hazard it creates is enormous. Therein lies the one pitfall of democracy, which is, literally, the rule of the Majority, but in no means guaranteed to be the rule of Truth or of Better Good. I am not saying that a tyranny would help anything, far from it: when resources are mismanaged to begin with, tyrants and dictators are often far worse in appropriating the public wealth to their private interest than any incompetent public authority, as seen in many African nations.
But there are times when there has to be an agreement to set aside politics and call on educated elites with both culture and expertise to submit the next game plan.

Michael Marquard

June 28, 2012, 2:59 p.m.

It might be helpful to remember that in spite of what Mr Friedman writes Germany has no ‘coffers’. If Germany decides to give any more money to the bottomless barrels of Southern Europe Germany will need to borrow it on the marked.
So what sensible person or institution would borrow money to pass it on to an addict to finance his or her good life?
And Germany very well would help to finance other countries if and that’s the thing the other don’t want to cede if they would agree to a common control of their economy and fiscal household.

david bollich

June 26, 2012, 9:18 p.m.

had to reply after reading Anatole…. or suffer cramping.  3 things - there are ways to get out of the current crisis, one being for the Germans to play ball BUT what happens thereafter?  2. Yes Germany is the odd ball but getting it out of the EU simply brings into play the second most responsible country as the new bully. 3.  yes, monetizing debt is a tried and true way to get out of it but does anyone care anymore what it does to the savings of the grownups.  Sad and disgusting

Lawrence Candee

June 26, 2012, 6:08 p.m.

I am struck by the market’s seeming lack of concern. It is almost a collective refusal to see reality, something which markets are obviously NOT known for. The vast likelihood is that todays policy makers will not meaningfully grapple with the problem until and unless the market forces them to do so. When that moment arrives we had all better hold on for a very rough ride.

Euro si, Euro no, Euro maybe but Eurall gonna see some fireworks eventually!

John Beeler

June 26, 2012, 4:03 p.m.

John:

    First thank you very much for your steadfast desire to provide your readers with the truth. As a result of what you have been writing (I have not read this outside the box yet)I felt compelled to share with Chancellor Merkel my view of her leadership. I wrote the following letter and sent it via email to the German Federal office I believe. Here it is short and sweet.

Dear Chancellor:

I am an avid reader of John Mauldin and other conservative economists here in the USA.

I see you as being under an extreme amount of pressure. I support your adamant position of not capitulating to the other primary Euro leaders.

My hope and prayer for you is not to worry about re-election but continue to be the admirable representative of the German people. Quite frankly, I believe the best position you can take at this time is to tell Europe that Germany will cede from the union. Tell them that in the best interest of Germany it is better to cut our loses short now because following the recommendations by Mario Draghi et al will lead Germany to experience ten times the loses in just a few short years. I would be proud to know you stood as a shining example of integrity for your people and the rest of the world regardless of the consequences. Gods speed to you Chancellor.

Regards, John Beeler

Yes I know John, that implementing this idea will throw thee world into certain chaos. But right now I believe that the international bankers and men like Soros all have bets that will reap them huge financial profits if Chancellor Merkel capitualtes as they are pressuring her to do.

Richard O'Toole

June 26, 2012, 3:27 p.m.

Why is volatility so low given these scenarios?

Terence Hill 38539

June 26, 2012, 2:38 p.m.

Well, the two alternatives contrasted are not a realistic fix because the underlying geopolitical root cause is that “Germany is too big to coexist and too small to dominate in Europe” (referring to Friedman’s earlier analysis).

The Vienna Congress of 1815 attempted to balance the power distribution in Europe after the void left by the Napoleonic conquests and defeat. It strengthened Prussia by allowing it to expand east and westwards, hoping it would become strong enough to protect Russia from another French invasion. This power equilibrium started to shift when Prussia coerced the southern German states into the newly founded Germany under its leadership in 1871. This was the tipping point and the real root cause for Germany’s imbalanced geopolitical position.

Before 1871 Germany was not considered a threat to its neighbors in Europe. It was partially occupied at times by some of its neighbors but not vice versa.

A stronger political integration of Germany into Europe is neither necessary nor sufficient to address the geopolitical issue: The landscape in Europe needs to be readjusted in the spirit of the Vienna Congress to restore an economic equilibrium among the bigger countries. One way to achieve this could be to allow the Southern states to secede from Germany again.

There is still a deep fault line in Germany between the North and the South, economically, financially, politically and culturally:

The southern part of the country (south of Frankfurt) represents about a third of the people and 40% of Germany’s exports. The southern states support the northern states with transfer payments to the extent of 1%-2% of their GDP - their citizens pay an extra 5.5% of income, corporation an capital gains tax to support the former East Germany. The total direct and indirect transfer payments from South to North Germany thus amount to 2%-3% of South Germany’s GDP.

These transfer payments are contested in constitutional court and for many people in South Germany highly contentious. This is fueled further by different political and cultural views over the role a Government should (and should not) play in the economy and the role a family should play in life. These differences have built up over centuries and will not be reconciled in the foreseeable future.

The southern part of Germany may well prefer paying 1-2% transfer payments to the PIGS than 2-3% to the state governments in North Germany, particularly the one in Berlin which is regarded as incompetent beyond rescue.

A stronger integrated Europe may be better balanced with two separate Germanys: A southern federation part of the EU and the EZ and a northern federation, just part of the EU, with a separate currency and a fiscal model closer to the one of the UK. Over time the two Germanys will find a better economic balance which has been shifting more and more to the South over the last decades. A point can be made as well to keep a norther German federation within the EZ instead.

Should there be a referendum coming up about the next step of the political integration in the EU then this question should be asked to the people as well.

Now here is a real “out-of-the-box” thought :-)

ian caton

June 26, 2012, 10:28 a.m.

This is about way more than money.

Most analysts take the present political map of europe as a given, it is not.

Merkel sees the chance for a big place in the history books, as the founder of the european super state.

Germany wants to move history on from “Post War”, it will pay a high price for redemption, sub suming itself into a powerful european superstate. What a sacrifice it will be seen as, giving up all those financial principles.

Germany only agrees to “not just enough” bail outs to keep countries in business but under the kosh from the markets. The markets are used by berlin as a tool.

I think it is amazing watching history unfold, what choice do the debtor countries have? None. I believe Angela Merkel to be one of the most brilliant politicians of modern times and one of the few sources of hope in the world.

Nick Jacobs

June 26, 2012, 9:40 a.m.

One year ago, John, you published in your weekly e-letter for June 25, 2011, a piece by “brilliant thinker” Charles Gave, in which he wrote:

  “The Euro will not exist in a year”

I have never been impressed by Gave’s predictions, and on the same day I posted on your forum - which was on www.johnmauldin.com/community/viewthread/ until you removed that forum a few days ago - my competing prediction, which was:
“The Euro will still exist in a year’s time. A majority of the current members will still be members. Moreover, continental Europe’s economically most important countries, France and Germany, will still be members.”

I also challenged you to bookmark that prediction and come back to it in a year’s time - to find out who has a better understanding of the Eurozone - Charles Gave, or me.

Your response was to delete the entire forum a few days before time proved me right, and Gave wrong.

I’m disappointed.

Vincent Roach

June 26, 2012, 9:16 a.m.

The part of this worth reall effort is the part that says we have to deal with the causes of the problem, instead of just the symptoms.  This is another way of saying that what separates man from the brutes and smart men from stupid ones is the ability to see the big picture and the long run, that is to be able to link actions to consequences and consider the future, versus just living in the moment.  All this debt is a result of stupid people living in the moment and many smart people thinking there is a way for them to take advantage of that.  Not much different than the sale and use of illegal drugs.  These are the causes, and while we cannot with a magic wand make people either smart or moral, we can institute policies and controls, and enforce them.  There are more and less traumatic ways to do this,and perhaps some of those involve some in-the-moment tactics (e.g., bailouts) but there has to be a viable plan and commitment to deal with the real causes before bandaids can be any more than a further contribution to eventual death, by fostering infection rather than stanching bleeding while more effective measures promote healing.

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