The case against the euro Just before the interview, Philipp had signed on to a German court case, which called into question the EU economic recovery budget. The claimants argue it was a violation of the EU treaties. And should thus be annulled. I knew it would be extraordinary news if the case succeeded. It would undermine the EU itself, the EU’s economic recovery, and finally establish a red line, which the EU cannot cross on its path to the United States of Europe. A German constitutional hurdle — they’re tough to get over. Because of the extraordinarily high stakes, which weren’t being mentioned anywhere else, I asked Philipp to explain the court case to my readers in the UK. You can read that article here. After reading this article, you’ll understand why Philipp’s explanation could be crucial to predicting what happens next. At stake is a panic bigger than Lehman Brothers. A few weeks ago, Philipp sent me an email. The subject line simply said ‘success’ and linked to a German newspaper story. That story explained the German constitutional court had prevented the German president from signing off on the law which would’ve created a debt union in Europe. A union in which the Germans would be responsible, however indirectly, for the debts of others. The court case, which Philipp had joined, would be heard and the law’s ratification would be delayed until the court’s decision. Here’s the English-speaking version of what happened from Reuters: ‘Germany’s constitutional court said on Friday that the president may not sign off on legislation ratifying the European Union’s Recovery Fund as long as it was looking into an emergency appeal against the debt-financed investment plan. ‘The statement by Germany’s highest court, after both chambers of parliament ratified legislation this week.’
Here’s what the court itself wrote: ‘We are aware that the Recovery Fund is a political project already decided upon. However, given the considerable risks involved, the federal government should ensure that borrowing at the EU level and a circumvention of the fiscal rules does not become a permanent solution.’
It’s not clear when the court will actually rule on the case. But over the last few weeks, reality has slowly dawned on all sorts of people that the implications of all this could be immense. It could end the presumption that the Germans will be willing to bail out other nations. And without their backing, we’d be right back to the worst of the European Sovereign Debt Crisis of 2012. An end to eurozone bailouts, or just a dangerous delay? Here’s how the media covered the news two weeks ago. The Financial Times: ‘German court challenge to EU recovery fund could last months. Analysts fear hold-up may unsettle investors and undermine confidence in weaker countries.’
Bloomberg: ‘EU Recovery Logjam Publicly Slammed by [French Finance Minister] Le Maire as G-20 Meets’
Bloomberg also mentioned the context of all this: ‘Recovery-fund spending plans also face convoluted bureaucracy from the EU, whose botched vaccine rollout already led to extended virus restrictions.’
And get a load of this from my favourite journalist Ambrose Evans-Pritchard in the Telegraph: ‘A legal sword of Damocles hangs over Europe’s vast bond market ‘With the €750bn Recovery Fund, Europe’s leaders have unwittingly created a device to explode their own project ‘The German constitutional court has struck again. The fund that was supposed to save Europe is in suspended animation. ‘If the European project ever unravels it will probably because of a ruling by the venerable Verfassungsgericht. ‘Each time its interventions become a greater threat. You can stretch the EU treaties and Germany’s Basic Law only so far. ‘The normal etiquette is for the judges to issue polite requests to the German president whenever required. This time they time issued an order. Their hackles are up.’
Now, so far I’ve given you an explanation for what’s happening and why all this matters. By reading the above and what I’ve linked to, you can understand the coming court case, the flaws in the euro and what’s at stake. But what happens next? We got a small taste of that in May of 2020, when the German constitutional court fired a shot across the bow of the European Central Bank. ‘Germany’s shock court ruling against the ECB challenges the stability of the euro zone,’ CNBC reported at the time. Southern Europe relies on two things to avoid a debt crisis. The first is the ECB’s willingness to print money to finance their deficits. They can’t default while their central bank is willing to finance them with freshly printed money. And secondly, they rely on Germany’s willingness to go along with their own financial prudence being leaned on by Southern Europe via an implicit bailout. The thing is, the law bans both. Deficit financing and bailouts are not allowed in the treaties — the Germans specifically insisted on this when joining the eurozone in its current form. And eventually, the law will catch up with the spenders. When? When the Germans have had enough. And that tends to be when inflation emerges — the oldest of German economic bugaboos. Inflation and then deflation All this creates an almightily confusing situation for investors. If inflation emerges, it could trigger an almighty bust up in the eurozone — the biggest default in history even, if Italy is the one to default. And that would be incredibly deflationary. I’ve seen plenty of analysts predicting deflation followed by inflation, or just inflation, or just deflation. But I’ve just laid out a scenario of inflation being followed by a huge financial panic and deflation. And that would catch out anyone positioning their portfolio for inflation in the future. So, don’t lose sight of just how flawed the euro is and how close we are to another European sovereign debt crisis. It won’t be a black swan when it happens. Until next time, Nickolai Hubble,
Editor, The Daily Reckoning Australia Weekend | 
