Shah Gilani: The clock may be ticking on the future of the European Union (EU). After being shaken to its core by the sovereign debt crisis, the entire Eurozone now runs the risk of blowing up within a week.
Germany’s highest court, the German Federal Constitutional Court, on Sept. 7 rules on the legality of German participation in the euro rescue fund that was established to bail out Greece.
If the court rules that Berlin’s commitment to the European Financial Stability Facility (EFSF) goes against EU law, or worse, against the German constitution, the entire Eurozone could collapse.
Think of the Eurozone as a minefield full of bombs that have long lay dormant, but are all still very active. Now, Germany’s court ruling – itself a single bomb timed to go off next Wednesday – could ignite a massive chain reaction.
Germany: The Eurozone’s Bomb Squad
Peripheral Eurozone countries like Portugal, Ireland, Greece, Spain, and Italy (the PIIGS) are in serious trouble and European banks face monumental liquidity and balance sheet issues.
So far, only Germany’s singular fiscal conservativism and economic strength have kept the EU from self-destructing. But now the Eurozone’s only legitimate bomb squad may be hanging up its lead-suits, pliers, and contagion containers.
What’s at issue for the Constitutional Court is whether Berlin broke the EU’s Maastricht Treaty, which unequivocally stipulates that member states cannot assume each other’s debts. And, more germane to German citizens and the center-right coalition government, will be the Court’s ruling on whether German Chancellor Angela Merkel‘s decision to fund the bailout facility circumvented constitutional requirements to put such fiscal matters before the German parliament.
And while the court isn’t ruling directly on the EU’s currency – or Merkel’s support of it – the decisions rendered will have consequences for the euro’s future and by extension, the EU as a whole.
All of Europe’s time bombs have been temporarily defused by Germany’s aggressive support of the euro, and the Chancellor’s vociferous demands that all of the EU’s sovereigns come to the rescue of its ailing members, for the good of the continent.
All the PIIGS have had to come hat- in- hand to the European Central Bank (ECB) and sister members to float their increasingly suspect debt obligations. But, it’s Germany alone that has the muscle to influence other states to join rescue efforts. And it’s Germany’s generous financial support that greases the meshed gears on which the entire European system turns.
Without Germany’s intervention, European sovereign debts will sink the EU, as well as the global markets.
Other cracks in the EU’s foundation are already widening.
The Future of the European Union
Finland, Austria, the Netherlands and Slovakia are demanding Greece supply acceptable collateral against any and all future installments it is to receive under bailout terms.
Just what constitutes acceptable collateral to Finland and its followers? How about the Athens airport, the National Bank, two ports and the country’s main telephone company?
Apparently, Greece’s creditors don’t want to have to maintain too much real estate in a hostile environment, so they are asking for state assets to be put into a trust in Luxembourg so they can eventually securitize those assets and then sell them if they don’t get their money back.
It’s certainly not a stretch to imagine militant unions in Greece fighting the government and threatening the International Monetary Fund (IMF), the ECB, and other Eurozone sovereigns when creditors take control of the state enterprises they all work for and cut their jobs.
Nor is it a stretch to imagine other European debtor nations being asked for similar collateral when they line up for bailouts.
We are fast approaching a difficult question: Are we coming to a point where integrated global economies, capital markets and cross-border debt obligations will necessitate sovereign nations losing control of their sovereign assets?
If the German court rules that European law has been broken, then it has been broken by all other nations subject to the Maastricht Treaty who have participated in bailouts and directly or indirectly assumed each other’s debts. If the German constitution has been broken, it’s unlikely that German citizens will tolerate any government that refuses to protect the constitution and their rights to participate in determining whether or not they want to backstop all the profligate neighbors that surround them.
The court may sidestep any hard and fast decisions to avoid destroying the entire EU. But it may not have a choice. The law is the law.
Investors need to keep their ears pinned to news reports about the German court’s rulings next week. And they need to be ready to short the euro, European and American banks, and European, American and Chinese stocks if broken laws lead to a breakdown in Europe’s monetary support mechanisms.
Shah Gilani is the editor of the highly successful trading research service, The Capital Wave Forecast, and a contributing editor to both Money Morning and The Money Map Report. He is considered one of the world’s foremost experts on the credit crisis. His published open letters to the White House, Congress and U.S. Treasury secretaries have outlined detailed alternative policy options that have been lauded by academics and legislators.
His experience and knowledge uniquely qualify him as an expert. Gilani ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When the OEX (options on the Standard & Poor’s 100) began trading on March 11, 1983, Gilani was working in the pit as a market maker, and along with other traders popularized what later became known as the VIX (volatility index). He left Chicago to run the futures and options division of the British banking giant Lloyds TSB. Gilani went on to originate and run a packaged fixed-income trading desk for Roosevelt & Cross Inc., an old line New York boutique bond firm, and established that company’s listed and OTC trading desks. Gilani started another hedge fund in 1999, which he ran until 2003, when he retired to develop land holdings with partners.