I recently bought quite some German shares. Here are my thoughts.
If Italy or Spain can't finance themselves via the bond market and also don't get money from the ECB because Germany doesn't allow it, and if Germany also doesn't agree to give out Eurobonds and also doesn't give them money directly, then many banks will be insolvent overnight. Millions of people won't be able to access 'their' money and we will see riots, a global depression and the individual Eurozone countries issuing new currencies so that they can at least pay the administration costs of their governments.
That's the fearsome split-up. It is the worst-case scenario and the German industry would suffer tremendously. But if it happens you also really, really want to own anything German because the new Deutsche Mark will skyrocket to a place somewhere near Mars.
Unlike the British, however, who already declared the Germans declaring war in their creative newspapers, I really don't think this is going to happen. Not only would Mrs. Merkel join history as the one German leader who single-handedly destroyed the European project, she also wouldn't survive the next elections. But most importantly, that's just not her plan.
Her plan is this:
At every moment the Eurozone can either use the ECB or Eurobonds to solve the crisis overnight. It's really very simple (if we ignore legal hurdles which have already been ignored in the past). If Europe issues Eurobonds it creates a market that rivals the one of the US bonds in size and liquidity. But, unlike the US, we have much lower debt and a much, much lower deficit. And we have governments who actively do something against debt. And the Chinese want to get out of US bonds anyway. Eurobonds are a silver bullet.
The same is true for the ECB declaring itself the lender of last resort. Suddenly it wouldn't make sense anymore to speculate against the Euro and the immediate crisis would be over.
But Mrs. Merkel doesn't like that - and nor do I. Here's why:
A declaration of dependence of the ECB as well as Eurobonds destroy incentives for Greece, Portugal, Spain, Italy and even France and Belgium to reform their economies (and actually tax their rich for a change!). These destroyed incentives would lead to a second crisis in a few years, maybe some decades.
All western countries - including Germany - need to stop spending more than taxes allow. It's not only unsustainable but it's also deeply unfair to tax the middle class to pay interest rates for bond owners. The only way to politically achieve this, however, is a deep crisis.
Mrs. Merkel is using this very crisis to finally create a European Union that has strong and effective controls in place to prevent member states from spending too much. This wasn't possible before. And to make it happen she will just wait. The current German course is not the result of some anti-inflation ideology. Anybody who followed German politics over the last few years knows that Mrs. Merkel is highly unideological (having a doctor of Physics I'd expect no less, of course :).
Only at the very last second - and I mean the very, very last second - will she act. It will be a super-complex mix of ECB and Eurobonds and ESFS. The European institutions will agree because if they disagreed their members could start looking for a new job the next morning. The other countries will agree because, well, spending reasonably and taxing the rich isn't as bad as the alternative, is it?
Shares would skyrocket in this case of course - especially if the ECB declares dependence and pumps money into the markets.
In any case I really don't see how to better place my money right now.