Submitted by Mark J. Grant, author of Out of the Box,
In all of the tortuous moments that have taken place with the European Union the one thing that has become apparent is a radical change of mindset. In the beginning there was a kind of democratic viewpoint. All nations had a voice and while some were louder than others; all were heard. This is no longer the case.
There is but one mindset now and it is decidedly German. It is not that this is good or bad or even someplace in between. That is not the real issue. The crux of the matter is that not all of the people in the EU are Germans and so they are not used to being treated in the German fashion, they do not live their lives like Germans and, quite importantly, they do not wish to be Germans.
There is the problem.
The Germans will do what is necessary to accomplish their goals. There is nothing inherently bad or evil about this but it is taking its toll on many nations in Europe. In the case of Greece they went back and retroactively changed the covenants of the bond contract. They did not actually admit this of course and they called it other names but that is what they forced on Greece. In doing so they got the bond holders to shoulder a good deal of the expense of the bailout of Greece. You can say, “Right,” you can say, “Wrong,” but that is what they did. They accomplished their goal.
Always remember that the Germans are under severe financial pressure. They are still paying the bill for the East Germans. They support Target2 and their economy is just $3.6 trillion which is a fraction of the entire Eurozone. They are trying to support a house with less than desirable supports.
Then we come to Cyprus and they make it complicated and put one bank with another bank and take money from depositors and call it a “Tax” and say that people and institutions are liable for where they keep their money when it is more than 100M Euros. All true of course but they do not allow for any “Rule of Law” or “Due Process” by the judicial system but just mandate that the money will be used to help pay Europe for a loan to the sovereign government. Then they also tagged senior bond holders reversing their position of the last years so now, so that it can now be said with accuracy; everyone is at risk. Consequently they have to pay less and they have accomplished several goals which are to punish a “Casino Economy,” to put Cyprus in the same position as Greece, which is not only bankrupt but a ward of the European Union, and finally to insist, by the use of money, that Cyprus succumbs to the German demands. Note that CDS in Europe (Markit iTraxx Financial Index) has jumped 22% in just one week.
It is the occupation of Poland in a very real sense just accomplished without tanks or bloodshed as money is used instead of armaments to dominate and control a nation. Politically you may “Hiss” or you may “Applaud” but there are consequences here for investors that must be understood.
First and foremost is that they will not stop. Nothing will be allowed to get in their way. It can be senior bond holders one day, bank depositors the next, the dismantling of some Parliament on the day after that, a wealth tax on corporations on Thursday, the disallowance of dividends on Friday; with every announcement to come on Saturday evening. The next week can be a cap on bank bonuses, a demand that the cap on bank bonus savings be returned to the State, a financial transaction tax that gets expanded and taxes all bond coupons and the list goes on. What might be, could be, and nothing, absolutely nothing, will be allowed between Germany and her desire to control all of Europe.
I do not speak of motivation here. I am not bashing Germany in the furtherance of their desires. That is a useless and unnecessary exercise. However, what is profoundly necessary, if you invest in Europe, is to understand the risks that you are taking. If you place money in securities on the Continent then what is yours is theirs when they want it. I suggest you clearly understand that proposition and allow for that occurrence.
You no longer have any excuse after Greece and Cyprus. Everything may be called “one-off” but nothing is “one-off” as Germany expands its power wherever they can and by any means necessary. If you believe the propaganda, if you believe what you are told every day by the Press then I can virtually assure you that you will suffer dire consequences at some point and you will now have no one to blame but yourself.
There is also one “unintended consequence” of Cyprus and Greece. No one is going to invest in the local banks. Keeping money in the German banks, the Swiss banks or maybe even the French banks may go on but the local banks in each country are finished. In a clever move, the problems with Greece and Cyprus will drive the money from the local banking institutions in the troubled countries. Watch for capital flights in Spain, Portugal and Italy as their banks will be found unsafe and with good reason.
It is unknown, as of yet, if Germany can win this game. What can be said though is that, nation or investor, you will put yourself at peril by getting in their way. The current risks, in my opinion, are dramatically more than imagined by many or generally thought to be the case. There is no more investing in Europe just gambling and speculating and suffering the consequence of either. Anything can be changed, anything can be modified, and when the forfeiture of people’s savings is trumpeted as a “Tax” then even the English language has lost some of its meaning.
“Better to be safe than sorry,” has never had such important consequences as it does now in the European arena of the Great Game.