As I've noted in previous articles, politics, not economics, rule Europe. What I mean by this is that most major decisions in Europe are determined by political agendas that ignore economic and financial realities.
This is at the core of the "welfare state" mentality that permeates Europe as a whole. The EU in general is comprised of an aging population that is more concerned about receiving the pensions/ health benefits/ social payouts that were promised to them by the system than anything else.
As a result of this, EU voters, who determine EU elections, don't take action until what has promised to them comes under threat.
For this reason, EU political leaders will maintain their agendas regardless of whether said agendas go against financial or economic realities (or common sense for that matter) until these agendas begin to have real negative consequences for their political careers.
A perfect example of this paradigm in action is German Chancellor Angela Merkel who was relatively "pro-bailout" until German voters began to thrash her political party in Germany's state elections (March 2011). She then altered her strategy to one of offering to provide bailout funds to Greece and others but only if these EU members met fiscal demands that were so onerous that the likelihood of them accepting the deal was little to none.
As a result of this decision to start playing "hardball," Merkel's political approval ratings shot to their highest levels since her 2009 re-election. At the same time, she was able to maintain her agenda of extending Germany's control over Europe from a fiscal perspective (another plus in the eyes of German voters) without abandoning Germany's allegiance to the Euro which would only turn the rest of the EU against Germany.
Again, politics, not economics, determine policy in the EU.
With that in mind, Nicolas Sarkozy is about to be defeated by a hard-core socialist François Hollande.
A few facts about Hollande:
Put another way, Germany's campaign for austerity in the EU is about to lose its biggest ally. How exactly this will play out is unclear, but it will not be conducive to the Euro lasting in its current form much longer: aside from the fact that the EU banking system is on the verge of collapse and Spain (a country too large to bailout) has now stepped to the center stage of the EU crisis, Germany is finding itself increasingly alone in its moves to rein in the ECB's monetary profligacy.
As you all know, I believe that if push comes to shove, Germany will leave the Euro rather than face inflation. On that note, inflation is rearing its head in Germany, and both front-runners in the French election are now firmly in the "inflate or die" monetary camp. This also does not bode well for the EU.
Inflation May Drive Germany Out of the Eurozone
It's hard to see a way out of this conflict. While peripheral Europe flounders under austerity and giant debt loads, Germany flourishes. Unemployment has fallen to 5.8%, creating a scarcity of workers that has attracted large-scale net migration under the EU's freedom of movement rules.
The result: surging demand for housing, especially in the urban areas. The rate of price increase as calculated by BulwienGesa AG for 125 towns and cities was 5.5% last year, considerably higher than in 2010, which showed a significant 2.5% gain over the prior year. That's not much by the standards of the pre-crisis U.S., but blazing for Germany.
Meanwhile, wages and salaries per employee rose more sharply in 2011 than at any time since 1993, according to the Bundesbank report. Add to that a recent deal giving Germany's two million public sector workers a 6.3% wage increase for the next two years and you get fuel being added to a slow-burning fire.
Make no mistake, the EU is in a collapse already. Remember, all collapses follow the same pattern:
1) the initial drop
2) the re-test/ attempt to reclaim upwards momentum
3) the roll-over/ REAL fireworks
The most money is made during #3. Right now we've finished #1 and are now ending #2. When #3 hits (likely after the French elections), is when the REAL Fireworks will begin (assuming Spain's collapse allows things to hold up that long).
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