Court to Rule on
Eurozone Rescue
Research for Online Investors

by John Dalt

9/01/11

It looks like the market is going to close out the week in pretty good shape.  We are sitting comfortably above 1210.  That fight is over, now we just need to decide if 1231 or even 1260 is going to fall, or is the market going to fall back to a lower support level.  While you are enjoying the weekend, storm clouds are gathering for next week.

The German Federal Constitutional Court is set to rule on the country’s participation in the eurozone rescue efforts.  Obama is going to address a joint session of congress on Thursday.  On the later, we expect an “infrastructure construction bank” and more spending.  Obama is not going to change, when you are a Keynesian, everything requires more government spending.

The German court will announce their ruling on Wednesday at 4 am Eastern Time.  The questions to be answered are; does aid by Germany to other eurozone countries violate German law and did buying other country’s debt violate European treaties?

The European Union Maastricht Treaty bars financial bailouts for member states, stipulating that member states cannot assume each other’s debts.  The Maastricht Treaty serves as a framework for the monetary union.  It has not been changed, but ignored for the last 15 months.  The eurozone has extended aid to Greece, Portugal and Ireland.

The court will also rule on whether German Chancellor Angela Merkel "bent" German law by skirting constitutional requirements to place fiscal matters before parliament.

Germany is the eurozone’s largest economy.

Germany is the largest eurozone economy and contributes 27% of the money used in rescue packages.  Without Germany’s participation any future aid to eurozone countries would be in question.  The eurozone has committed $393 billion in rescue funds so far.  Germany’s share of this is approximately $106 billion.

Court observers do not believe the court will rule against past bailouts, but may require parliament’s approval for any future bailouts.  The European Stability Mechanism (ESM) is planned to begin operation in 2013.  It will replace the European Financial Stability Fund (EFSF) that has been pieced together in the last year.

Chancellor Merkel’s administration has evidently seen the handwriting on the wall.  Next Wednesday, Germany’s parliament will consider action taken in June by eurozone leaders.  Eurozone leaders want pre-emptive powers to buy sovereign bonds and extend lines of credit before a country is declared in a crisis.  Leaders also agreed to raise the EFSF lending capacity to $638 billion, which would raise Germany’s exposure to $172 billion dollars.

In a strange twist of politics, opposition politicians have voiced support for the eurozone rescue package legislation, but Merkel has problems with her conservative Union party and the Free Democratic party (junior coalition party) members.  If she cannot carry a majority with her coalition members in parliament, the government may fall. Merkel’s Union and the Free Democrats hold 330 of the 620 seats in parliament’s lower house.  Let the whipping begin!

We have had a rough but in the end good two weeks in the market since congress went home and the President went on vacation.  They are all back in their full glory next week.  That alone is enough to knock the market down!

Initial Unemployment claims came in this morning at 409,000, right in line with market expectations.  Continuing claims were 50,000 higher than expected and unit labor costs took a bigger jump than the market anticipated at 3.3%.  The big news was the ISM Manufacturing Index was reported at 50.6 which did not confirm the terrible reading out of Philadelphia two weeks ago.

Mailbag:  I wondered why Daryl Hannah hadn't been in a movie lately.  She's too busy being an idiot.—Long-Term subscriber L.M.

Editor’s note: Thank you for the many kind personal notes about Trixie.  We buried her last night.

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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