By Michael Pento, Jul 2, 2012

In the past few days there appeared to have been a huge victory scored by Europe’s three Italian Super-Marios. But appearances can be deceiving.

Mario Balotelli scored two goals for Italy’s Azzurri, in a resounding victory against the Germans during Thursday’s Euro 2012 semi-final Football game. But that victory was shot-lived, as the Italian national team was beaten 4-0 this Sunday by Spain.

Italy’s Prime Minister, Mario Monti, stared down his German counterpart last week at the E.U. Summit and demanded that there be no austerity strings attached to a 500 billion Euro ($630 billion) bailout fund, which he insisted must also be allowed to purchase Italian bonds directly.

And ECB chief, Mario Draghi, hailed the decisions coming out of Brussels saying, “The future possibility of using both the European Stabilization Mechanism (ESM) and the European Financial Stability Facility (EFSF) for direct capitalization of the banks, which was something that the ECB had advocated for some time, is another good result." According to the ECB, the other “good result” is not having those loans pass through PIIGS’ budgets first, which would have exacerbated their debt burdens.

Allowing the ESM and EFSF the ability to directly purchase Italian and Spanish debt will temporarily bring yields down from their previously dangerous levels. That will hold in abeyance any imminent fear of Euro dissolution and place a bid under the currency and bond market. It is worth noting that the rise in Europe’s debt and currency market would be greatly enhanced if any of the stabilization funds were given bank status, which would allow them to lever up their balance sheets and also be eligible to sell its assets to the ECB. That would vastly multiply the 500 billion Euro’s worth of buying power many times over and that is exactly what I believe the EU will eventually end up doing.

However, it does not solve any of Europe’s problems. It does not purge any of their debt burdens and does little to nothing in the way of boosting GDP growth. Neither does it eliminate the eventual need for deleveraging to occur.

In fact, in the long term it makes things much worse. First off, the $630 billion dollars in bailout money isn’t enough to keep PIIGS countries out of the public debt market for very long and will need to be expanded in the not too distant future. Secondly, if the debt monetization strategy is deployed and if it occurs in the size and duration needed to keep sovereign yields from spiking to record highs, it will produce an unprecedented dose of stagflation throughout Europe. Therefore, at best this buys Europe a few weeks reprieve until rates begin to rise and markets begin to fall once again.

Mario Balotelli and his teammates failed to secure the UEFA cup for Italy. It is also assured that the EU Summit meeting will not produce a lasting victory for Mario Monti or Mario Draghi. The problems that plague Europe remain and will most likely intensify.

For now the biggest winners will be gold and gold mining shares. A falling dollar and rising Euro will reverse much of the damage done to the precious metals sector during 2012. Of course, down the road the gold market will most likely need to see Bernanke follow through on his threat to launch QE III in order to resume its bull market. Since the debt of Europe and the U.S. is only going to increase in both nominal terms and in terms of GDP, their economies will continue to deteriorate. The behavioral history of central bankers in Europe and America has clearly illustrated that massive debt monetization will be inevitable. Therefore, a new nominal high in the price of gold in Euros and dollars is an eventuality as well.

This article is written by Michael Pento of Pentoport and with his kind permission, Gecko Research has been privileged to publish his work on our website. To find out more about Pentoport, please visit: