Much of the prevarication can be attributed to political disagreement in Germany, where some see the current crisis not only as a means to further European unification, but also as an opportunity to extend German influence throughout the continent. Other Germans, particularly those in the south, see the crisis as a means to roll back the flawed structure of the eurozone. The resulting indecision is allowing adverse sentiment to set a time-bomb under the euro.

In truth, recovery has no chance of taking hold without a clear idea of what Europe may look like politically in a few years. Today, there is a desperate need for a momentous decision by Germany.

Rest assured these are problems that can’t be swept under the rug. Greece now has a debt-to-GDP ratio of 173 percent. Simply put, it is hopelessly bankrupt. The ‘troika’ of the EU, ESM, and IMF are demanding that Greece accept more austerity in return for more funding. But, already, austerity is reducing Greek GDP and tax revenues while creating civil unrest and a greater demand for social security payments.

The austerity medicine in Greece is also creating similar problems for Italy and Spain, whose economies are much, much larger. Spain has twice the outstanding debt of Greece, Ireland, and Portugal combined. Italy has five times that amount. The sums needed to rescue Spain or Italy would stretch even Germany to the limit of solvency.

Already, the euro is falling fast even against the deeply flawed US dollar. As I see it, there are three possible conclusions to the crisis:
1. The euro splits into two parts: one for the cash-generating northern countries and one for the Mediterranean countries, possibly including France. This two-tiered system would take into account the differences in economic reality for the two regions and would provide much more financial flexibility.

2. Some of the Club Med countries are forced to leave the euro, re-issue their own currencies, and attempt to generate earnings to repay debt.

3. The euro ceases to exist. As the world’s second currency, this would result in a short-term stampede into other fiat currencies such as the yen, Swiss franc, Norwegian krone, Australian and Canadian dollars, even sterling, but predominately into the US dollar.

Any one of these outcomes is preferable to the unsustainable status quo. But an orderly Greek default combined with an exit from the euro would be the best strategy to move forward. Unfortunately, this option is unpalatable to internationalist politicians, who want to maintain the pan-European government, and the banking system, which is choking on bad sovereign debt. Still, talk is growing.

If a default does come, the big question is how much creditors could lose through debt haircuts. Recently it has become clear that the 21 percent haircuts for private holders of Greek debt, which had been agreed on in July, may have to be deepened to 40 or even 50 percent. However, calculations will need to me made as to how much losses can be accepted by the banks before their insolvency threatens the solvency of their own nations. Very few observers know for sure how much bad debt lurks on the balance sheets of the big European banks. This question alone threatens further and more dramatic contagion.

Eurozone governments, in particular Germany, France, and Belgium, have long ‘persuaded’ their banks to load up on PIIGS sovereign debt. Now, unsurprisingly, a PIIGS default threatens German, French, and Belgian banks. France has some of the largest banks, all carrying unknown amounts of these toxic assets. BNP, Credit Agricol, and Societé Géneral alone have combined assets (of all sorts) of some $7 trillion. This staggering sum is equal to about half the US Treasury’s massive debt. However, the French economy is less than one fifth the size of the US economy. If losses related to bad sovereign debt were to push any of these banks into default, the ramifications could be dire for France.

The world’s immediate economic future rests with a prompt decision by Germany to abandon its dreams of empire and cut off funding for the PIIGS. Such a move would protect Germans from unlimited bailout requests, save the people of the PIIGS from unnecessarily harsh austerity measures, and provide a needed reprieve for the euro and international fiat currencies.

For an even more in depth look at the prospects of international currencies, download Peter Schiff and Axel Merk’s Five Favorite Currencies for the Next Five Years.

By:
John Browne – Euro Pacific Capital

In contrast to this American expectation for more monetary manna from the heavens, many Eurozone governments have instituted harsh austerity programs. But behind the scenes the European Central Bank (ECB), in direct contradiction to the EU formation treaty, continues to enact a rescue package that purchases billions of dollars of subpar Eurozone sovereign debt. But at present, few governments or large financial players care much for legality.

As just about everyone knows, the lion’s share of the bailout funds used by the ECB comes from Germany. However, the assumption that Germany will continue to provide these rescue funds depends not on German politicians and public opinion, as most investors think, but on the crucial judicial review of Germany’s Federal Constitutional Court.

Unlike the U.S. Supreme Court, the German high court is not an appeals court. It conducts detailed proactive judicial review of all German Government actions. In its field, it is supremely powerful. The citizens of many countries, including those of the US, UK and EU may wish they had such an effective curb on the abuse of constitutional power by national governments. Indeed, it could be argued that had such a court existed in the US, UK, and EU, most of our current political, economic and financial woes would not exist.

In addition to its prodigious power, the Federal Constitutional Court of Germany is physically sited in Karlsruhe, well away from any ‘persuasion’ in the political center of Berlin or the financial center of Frankfurt. The Court is truly independent and has ruled quietly, often against government actions. Quite recently, it ruled that the EU had a serious “democratic deficiency.” As a result, it ruled that many EU rulings would have no effect in Germany until they had been debated fully by the German Parliament. Unlike the courts of many nations, this one is no political pushover.

German bailouts have been central to all proposed “solutions” to the European sovereign debt problem. Defaults from even small Eurozone states would be a threat to many huge international banks that either hold significant amounts of Euro sovereign debt or have exposure to it by way of credit default swaps or interbank relationships. Still more important, continued German bailouts are of singular importance to the survival of the euro—the world’s second currency, which forms much of the exchange reserves of major central banks and corporations worldwide.

In short, if the salvage of many Eurozone nations is not led by German bailout money, the euro may well collapse, threatening the world’s major banks and many governments.

The Federal Constitutional Court of Germany is due to issue a judicial ruling on September 15 regarding the Constitutional legitimacy of the German Government’s spending of citizens’ money to bailout foreign nations. The future of the euro, the international banking system, and even of the entire socialist European Union experiment, can hang on the Court’s decision.

Given the importance of such a ruling, it is surprising that the proceedings have been largely ignored by the mainstream media. However, if more market participants were aware of how an adverse ruling from the Court would throw a monkey wrench into the entire bail-out apparatus, the mood would be quite different in stock markets on both sides of the Atlantic. If German bailout spigots are tightened, financial stocks should plummet and the euro could fall sharply. In contrast, Swiss francs, Yen, Sterling and even for a short time the US dollar, may rise. But the biggest impact could be in the precious metals market.

So keep your eye on German legal news. It may make more impact on your portfolio than you ever could have imagined.

By John Brown – Euro Pacific Capital

But while President Obama prepares to unveil a new plan for the Federal Government to create jobs, evidence is rapidly piling up on how his Administration is actively destroying jobs with stunning efficiency. Recent examples of this trend are enough to make anyone with even a casual respect for America’s former economic prowess hang their head in disgust.

The assault on private sector employment began in April when the democrat controlled National Labor Relations Board (NLRB) issued a complaint seeking to force Boeing aircraft to move Boeing’s newly opened non-union production facilities in South Carolina back to its union controlled plants in Washington State. Although Boeing simply says that it is looking to open a cost effective domestic manufacturing facility (an endangered species) to employ American workers, the NLRB alleges that the company was punishing union workers in Washington for past strikes. Despite a lack of any direct evidence that Boeing was being punitive, and the fact that the company was not laying off any union workers, the NLRB has not backed down. Against little public support and nearly universal revulsion among business leaders, the NLRB is continuing its campaign to keep Boeing from exercising its freedoms and to employ people in a manner that makes sense for its business.

The Boeing move served notice that the Obama’s loyalties were firmly tied to the Union interests that were so critical to his election in 2008. This week, the anti-business tendencies of the administration came into even sharper focus.

In the telecommunications industry, service provider AT&T made the seemingly essential move in its attempt to acquire wireless specialist T-Mobile. But the Justice Department sued to block the $39 billion deal on antitrust grounds, saying that the merger between the second and fourth largest cell phone providers would unfairly restrict competition and raise prices.

In so doing, the DOJ seems to be operating under the assumption, without any direct evidence, that at least four companies are needed to provide healthy choice in the marketplace, and that three providers simply won’t cut it. More broadly, competition may increasingly come from outside the telecommunications sector (in particular from cable and satellite industries). Plus, with the speed of technological change, who knows what types of competitors will arise in the years to come. The situation reminds me of the broken merger in 2004 and 2005 between Blockbuster Video and Hollywood Video. Based on antitrust concerns emanating from the Justice Department, Blockbuster backed off from the deal. Of course, just a few years later the whole sector was made obsolete by Netflix, and any advantage Blockbuster would have gained would have only been temporary.

In light of the current and future competition that is sure to change the way consumers talk with one another over great distances, AT&T and T-Mobile are much better positioned to survive as a combined entity. In any event if AT&T can’t buy T-Mobile, someone else will. The company’s parent, Deutsche Telecom, has stated its intention to divest itself of its American subsidiary.

So why not help American business survive in an increasingly competitive market? Most likely antitrust lawyers at the DOJ have been otherwise bored with the lack of merger deals to scrutinize (another downside to a weak economy), and this transaction just happened to be in the wrong place at the wrong time. But the legal activism will certainly cost jobs. Even the unions recognize this and have supported the merger.

But the absurdity of the current environment reached a peak when the DOJ, and agents from, get this, the U.S. Fish and Wild Life Service, raided the Nashville factory of the legendary Gibson Guitar company. The raid resulted in agents carting off more than a half million dollars of supplies and essentially shutting the company down. The take down of one of America’s commercial icons apparently resulted from Gibson’s purchase of partially finished ebony and rosewood guitar fingerboards (these endangered trees are carefully managed) from an Indian supplier.

Now here’s the interesting part. The Indian government had issued no complaint about the transactions and there was no evidence that the company had violated U.S. law. The DOJ acted simply on suspicion that Gibson had violated Indian law. Since when do U.S. companies have to make sure that they comply with laws of every country in the world before they produce a product?

I had the good fortune on interviewing Henry Juszkiewicz, the CEO of Gibson on my radio show this Thursday.

After speaking to him, I didn’t know whether to laugh or cry at the stunning economic incompetence of our government officials, who in the cause of arbitrary regulatory nitpicking, seem willing to sacrifice the reputation and prospects of one of the few remaining American manufacturers. God help us all.

On the other side of the coin, the government’s own efforts to create jobs in the private sector have met with little success. It was announced yesterday that Solyndra LLC of Fremont California, a manufacturer of solar panel has filed for bankruptcy protection and has laid off its remaining 1,100 workers. The development is notable because the company was a veritable poster child of the Obama Administration. The president himself visited their facilities in May of 2010 and touted the company as the template for America’s “green technology” future. As a result of its politically advantageous profile the company was able to secure $535 million in loans guaranteed by the government.

But apparently government blessing does not guarantee market success. Unfortunately, Solyndra could not sell its products profitably despite the government support and cheerleading. Instead $535 million in investment capital was diverted from potentially money making enterprises to a money losing enterprise. This is what happens when government calls the shots.

When it comes to the financial sector, the government can’t seem to decide whether it wants to preserve jobs or destroy them. After bailing out the banks three years ago (and making some of them too big to fail), it was reported today that the government is preparing to launch a multi-billion dollar lawsuit to recoup losses that Fannie Mae and Freddie Mac suffered on mortgage backed bonds (loans that the government itself encouraged the banks to make). If the government were to prevail, job losses would surely emerge in the sector, and the government may need to bail out the banks once again!

So as we wait with eager anticipation as to what the President may reveal in his jobs speech next week, you can be sure that it’s not going to help America regain its competitive edge. The sooner we regard the government as a job killer rather than a job creator, the sooner we can all get back to work.

Peter Schiff is the CEO of Euro Pacific Capital