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Ms. Merkel and the Markets

NEW YORK ( TheStreet) -- When the news hit of German Chancellor Angela Merkel's re-election to a third term, I quickly picked up the phone and dialed Jim Rickards, portfolio manager and author of bestseller Currency Wars, to get his take and guidance on the potential outcome for investors.

Here is an overview of our conversation.

Impact of German Elections on European and U.S. Markets

Angela Merkel's smashing victory in the German elections Sunday has implications not only for politics but also for capital markets. It is well known that Merkel has been an outspoken advocate for what she calls "More Europe." The idea is the European Union and the euro must be preserved and expanded as part of a European integration project that stretches back almost 70 years.

But the German electorate is highly skeptical of this project since it appears Germany is continually being called upon to provide financing to bail out EU members including Greece, Portugal, Ireland, Cyprus and perhaps others in future. This forced Merkel into a delicate balancing act.

On the one hand, she did not want the European project to fail. On the other hand, she needed to appear tough and demanding in order to appeal to the German electorate. This was partly the cause of the on-again, off-again drama of the European sovereign debt crisis from 2010 to 2012.

Now that Merkel's victory is secure, she will be in a position to move Germany and Europe in the direction of closer integration and mutual economic support without fear of losing her electoral base in the process. As a practical matter, this means implementation of the Fiscal Treaty, unified bank regulation under European Central Bank supervision, unified bank deposit insurance provided by a new agency, and finally the issuance of euro-bonds backed by the combined credit of all members of the eurozone.

All of these trends are already in motion, but now they are set to accelerate. Merkel will be careful to involve Brussels, the ECB and the International Monetary Fund in her actions, but there is no doubt Berlin is calling the shots and setting the tempo.

Germany will not be a sugar daddy for Europe. It will be quite demanding in conditionality as the integration project moves forward. Euro-bonds backed by full eurozone credit should not be expected until other aspects of the overall plan, including strict adherence to the Fiscal Treaty, are in place. But the plan is in motion and will play out over the next three years.

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