Euro Pacific Capital 
Sept 13, 2011
In the early days of September, financial markets worldwide were nervous. Investors and governments were waiting for a crucial ruling of the Federal Constitutional Court of Germany, a ruling that could have triggered the imminent collapse of the world’s second currency, the euro. This past Wednesday, the court ruled that the German bailout of Greece did not violate the German Basic Law (i.e. constitution), and investors breathed a collective sigh of relief.
The court’s decision paved the way for the euro and stock markets to rebound strongly and precious metals to fall back. In addition, there were reports that China would end its series of rate hikes. By the close, news emerged that the Italian Senate had agreed to an austerity program. Markets rallied further. Commentators were ecstatic. And, almost universally, no thought was given to the long-term consequences of these moves.
I accept that the German court ruling averted an imminent disaster. But it may ultimately undermine any hope that eurozone can become a healthy currency bloc again.
- A d v e r t i s e m e n t
Europe still has a critical problem with public debt. Despite austerity programs that push past the tolerance of local populations, Italy and Greece still have debt-to-GDP ratios of over 100%. The eurozone’s core countries, France and Germany, are above 80% on that measure. It is clear to me and my colleagues at Euro Pacific that debt at these levels will mean partial default.
But the manner of that default can be either honest or dishonest: either bondholders are told what the losses will be or the currency is devalued to pay back the nominal obligations. The EU elites are pushing for the dishonest option, and it seemed like the German court ruling would be a victory for monetary union – for the purposes of transferring debt to the Union and then using inflation to reduce it. This route would prevent any breakup of the euro in the short-term, but turn the currency into another fiat basket-case in the mid- to long-term.