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Eurozone Engine Stalls; German Court Rules Bailouts Legal

Yesterday’s announcement that factory orders in Germany plunged 2.8 percent in July sent shockwaves through the Eurozone. The poor showing had investors scrambling on fears that Germany may no longer be in a position to serve as the “engine” to power the region’s recovery.

By the end of the trading day the euro had declined by more than one percent to close below the $1.40 mark for the first time since the middle of June. European stock markets were in decline as well with the DAX paring a full percent in value on Tuesday while the CAC 40 and STOXX 50 both lost 1.13 percent and 1.28 percent respectively.

Eurostat, the European Union’s statistical office, noted that Eurozone growth fell largely because of the “poor performances” of the region’s two largest economies, France and Germany. According to Eurostat, France recorded no growth in the quarter while Germany could only manage a very disappointing 0.1 percent improvement.

Eurozone Engine Has Stalled

The weakened state of the economy has not been lost on businesses or consumers. For the month of August, German business confidence fell to a four-month low while the consumer confidence index is set to retreat to the lowest level in a year; worse still, there is a greater sense that the weak results for the quarter are merely the start of a longer trend.

The total of the rescue packages provided so far amounts to about 300 billion euros (US$422.1 B) of which Germany – as the region’s largest economy –has provided roughly 25 percent. This has caused a backlash at home [1] for Chancellor Angela Merkel and it is only through great effort [2] that the Chancellor has managed to garner sufficient support to keep the coalition government onside with her efforts to prevent a Eurozone member default.

This task has likely become more difficult in the wake of today’s ruling on the legality of participating in the provision of the emergency bailout packages.

German Court Rules Bailouts Are Legal

Earlier this year, a handful of disgruntled German politicians opposing the use of taxpayer money to bailout other sovereign nations turned to the courts for a ruling on the legality of the bailout deals. At the heart of this legal challenge was the European Union’s “no bailout” clause intended to force all member countries to abide by the deficit and total debt limitations required for acceptance into the Eurozone membership.

The ruling was delivered earlier today and while the actions were found to be legal, the court did add new conditions to future payments. Chief amongst these new rules is the requirement that will force Merkel to gain approval from the German parliament’s budget committee before Germany can contribute to the European Financial Stability Facility (EFSF) or the European Stability Mechanism (ESM) planned for 2014.

While this ruling does clear the way for Germany to continue to act as the leading sponsor for the EFSF, it does raise the possibility that the budget committee may deny Merkel permission to contribute to the bailout funds. Should this happen, there is a strong likelihood that both funds will fall far short of their targets leaving insufficient funds to prevent a Eurozone member default.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Scott Boyd

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