News out of Europe yesterday included a proposed plan by France and Germany to solve the EU debt problems. This plan called for the creation of a “collective government” run by the EU President and a tax on every financial transaction. Both of these ideas are significant and, we believe, unworkable.

By setting up a “collective government,” Germany and its people will continue to transfer wealth to weaker countries in the EU. Part of setting up the collective government is that countries would no longer issue their own bonds, but would issue Eurobonds backed by the EU as a whole. In doing so, interest rates would fall in the PIIGS, but would rise in Germany. In other words, it would hurt Germany because it would pay higher interest rates and take on the risks of all the countries in the EU. Politically, German Chancellor Merkel is dead on this issue as her popularity has sunk to its lowest level in nearly five years. In December of 2010, a poll by ZDF television of 1,421 Germans found that 62% opposed greater aid to the PIIGS. That was eight months ago. Recent polls now show a majority of Germans now want to dump the Euro and go back to the Deutschmark. We don’t believe Germany wants to be the piggy bank for the rest of the EU countries and lose its sovereignty to the President of the EU.

A tax on every financial transaction makes no sense. European banks are in bad shape. This tax is the equivalent to the adage “kick‘em while they’re down.” When I was in Italy a month ago, many vendors did not accept credit cards. Our guide in Rome said they did this to get around having to pay taxes. This new tax will only serve to drive transactions further underground. We believe it will also drive deposits out of banks.

This is a last gasp effort to save the Euro. It might buy a little time, but Merkel cannot continue to act against the wishes of her people. Eventually, we believe the German people will win out and the EU will collapse under its own weight. The uncertainty surrounding the EU debt crisis will continue to weigh on stock markets around the world. We believe it is still prudent to play some “defense” at this time.

Sincerely,

Your THOR Team