Euro Crisis Here To Stay

Gold and silver prices once again showed some strength on Friday, as has often been the case in recent weeks. After being under pressure in earlier trading, the yellow metal reversed sharply at $1,605, popping up to its short-term resistance zone at around $1.625 and settling slightly lower at around $1,620. Silver rallied almost 60c and spiked from a low of $27.60 to over $28.30. It too has given up some of those gains since and is currently trading around the $28.00 level.

In the meantime, news out of Germany show that the underlying problems of the eurozone crisis are still far from being resolved. According to data from the Ifo Institute in Munich, the German current account surplus is estimated to reach 210 billion US dollar in 2012. The institute calculates that this surplus will be the highest in the world and bigger than China’s surplus with an estimated 203 billion US dollar.

While many politicians in Germany have celebrated current account surpluses as a "good thing" in the past – coining phrases like "world export champion" – these trade imbalances caused by neo-mercantilist thinking have shown to be a major fundamental driver of the current financial crisis in Europe. In simple terms, this new data shows once more that the competitiveness of the crisis countries has not improved.

After it became obvious that the PIIGS countries were not able to repay the loans (read: German savings) with which they financed their spending spree in the years 1999-2007, those private capital flows from Germany into the periphery reversed, leading to a sobering crisis in those nations. In response, governments have set up public capital flows in the form of ‘rescue packages’, which basically force Germany to continue to give more loans to those countries, but now on the government level.

The fact that the German current account surpluses are now rising back to the same levels as before the euro crisis shows that those public capital flows are keeping the imbalances in place, causing periphery countries to further indebt themselves for unproductive expenditures. The question will therefore be: How long will Germany be willing and able to continue to give out loans that are likely never to be repaid?

While easy money from the central bank might be able to cheer up markets in the short term, it is quite clear that until these underlying imbalances in the eurozone are addressed, the crisis looks like it’s here to stay.