FEZ SPDR Euro STOXX 50

Investors wonder why Germany appears to be playing a dangerous game of chicken with the bond vigilantes. Why do they seem to risk contagion and implosion that could sink their economic union into disarray, if not depression?

It's simple. As I wrote on September 12, "Germany is controlling the game on multiple levels." They hold the cards and feel no need to rush in with the ECB fire hose while they can continue to benefit from a weak euro and from political and economic concessions from Club Med.

While they let fires burn in Athens, Rome, and Madrid, they have probably helped inspire (install?) new governments in those capitals. Is Paris next? (Just kidding Sarkozy.)

Shrewd Moves?

Merkel and Co. let the stress cracks grow and reap change without harming the integrity and wealth of the ECB, which one could argue is simply Germany's formerly powerful Bundesbank in disguise.

Don't get me wrong. I admire their resolve to fight inflation at all costs and maintain fiscal credibility. I just think we are also witnessing masterful politics behind the scenes. Or rather, right out in front but with the appearance of doing nothing at all.

So this weekend's chatter about a new form of integration that would circumvent existing EU treaties is very interesting. On the one hand, Germany wins if Club Med has to roll over to more fiscal control.

And if that doesn't work, Germany wins if a breakup results in a smaller, stronger core eurozone of 8 to 10 countries.

Wise Dilemmas?

Will these "fast-track" end-around EU treaty changes to enforce budget discipline actually work when it seemed real political change through conventional means could take six months to a year? Hard to say.

More importantly now, are they, as Merkel says, the key to solving the eurozone debt crisis, or are they simply moving Europe further toward a smaller "core zone?"

What I found most interesting today in all of this was a Bundesbank "wise man" speaking out in favor of extraordinary ECB intervention. The "wise men" were legendary market elders from the days of the Deutsche mark who quickly faded into the background as the ECB had to become a more stabilizing global citizen on behalf of the euro in the last decade.

From a Reuters story this morning...

"If this bond run is not stopped it will really endanger the stability of the European and even the global financial system. Bold action by the ECB is definitely needed," Peter Bofinger, one of the five "wise men" who formally advise the German government on the economy, told Irish state broadcaster RTE.

Seems like it takes a nervous German conservative to get Merkel thinking creatively for solutions. Still, I think she may be the shrewdest, wisest, and most conservative of all.

Kevin Cook is a Senior Stock Strategist with Zacks.com
 
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