EUROPE: by Colin TeeseNews Weekly
Germany the obstacle to solving eurozone crisis
, July 7, 2012
Perhaps the most informed Australian commentator on world financial markets, Satyajit Das, writing on the ABC website, has said of the deepening eurozone crisis: “It’s now about Germany, not about Greece, Spain, Italy, Ireland or Portugal! Germany is financially vulnerable. Irrespective of the course of events, it faces crippling costs.” (The Drum Opinion, June 7, 2012).
He’s right. Germany’s reaped all the gains. Now it’s payback time — not only for Germany, but also for the entire eurozone whose economic well-being has been harmed by the euro-experiment.
Germany is not helping matters. It is demanding that loans made to poorer European countries, to enable them to buy Germany’s exports, should now be paid back even though they are unable to pay.
Insolvent debtors are at the heart of the crisis. Unless creditors allow the bad debts to be written off, the crisis will continue to destabilise European, and possibly even global, financial markets.
Of course, the “writing off debts” option is easier said than done. Creditor banks in a number of European countries face insolvency. These banks’ weakness jeopardises the integrity of European financial markets. Governments, in the end, must rescue the banks to save the financial system. Governments in the creditor-bank countries understand and resent this, which goes some way to explain their fulminations against so-called profligate borrowers.
Additionally, European governments forced to bail out banks with taxpayers’ money must inevitably confront major political obstacles.
Germany’s Chancellor Angela Merckel, in particular, faces a hostile parliament and strenuous elector resistance in her country at the prospect of more taxpayers’ money being earmarked for bailouts.
Faced with such resistance, Mrs Merkel might find that the less bad option would be for her government to acquire the German banks. Were that to happen, other governments might be required to follow suit.
Embarrassing though such a direct interventionist path might be for Western Europe, there is, of course, a recent precedent for such bank nationalisation.
In the early 1990s, Sweden’s banks found themselves similarly embarrassed and the Stockholm government decided there was no alternative but to recapitalise them with public funds — in other words, to take them over. It was never intended to be a permanent arrangement, and, once the banks were functioning smoothly again, they were resold to the private sector. All of the public money used for the bailout was recovered with interest.
That having been said, Sweden is not necessarily an ideal model for Western Europe. It has always been a country which has allowed government to have a much larger say in running the economy.
Fixing up the banks, though absolutely essential for a healthy Europe, is not, of itself, enough. The problems of the currency union remain.
The difficult question is: can the European Union’s embattled nation-states rebuild their economies while they are forced to remain locked into a single currency? If they reverted to having their own currencies, they could at least gain some control over the relative values of their currencies. The troubled economies could devalue and regain a measure of competitiveness, their separate currencies once more reflecting existing states of economic health and relative levels of economic development.
Politically, however, breaking up the eurozone would be a setback for European federalism. A single currency was regarded as an important step along the road to a United States of Europe — with a central European government wielding political and economic power.
Leave aside for the moment whether or not that objective is realistic — it remains a necessary element of European integration. To admit that currency union cannot accommodate various member-states at different stages of economic development, and with different cultural identities, is to expose a fundamental weakness in the European project.
Meanwhile, the problems of keeping the currency union multiply. We know that many people in the indebted countries of the eurozone, who are in a position to do so, are moving their euros offshore — mostly to Germany. The yield on two-year German bonds is negative. In other words, people are paying the German government to hold their money for two years.
Consider what this means for European financial stability — Greeks, for example, shifting their euros to Germany for safe-keeping at no interest, and Germany re-lending to Greece in the form of a bailout with significant interest and other onerous conditions. Assuming other enfeebled economies follow the same example, Europe’s financial chaos will certainly be made worse.
That aside, once we talk about dismantling the eurozone, the particular problems of Germany are brought into clear focus.
Soldiers who survive wars and end up with a chest full of medals were once said to have had a “good” war. Until now, Germany has had a “good” European financial crisis. Its economy has grown steadily since 2008; its businesses and workers have done well.
German politicians and officials like to think it’s all due to good, prudent German management. The big spending countries now in trouble deserve their fate. What Germans won’t acknowledge is that if profligate spenders can’t pay their debts, the lenders have been no less irresponsible. And the big lenders have been Western European banks, especially those of Germany.
According to Satyajit Das, German banks alone had about $US500 billion exposed in the EU’s enfeebled economies. Mr Das further tells us that European Central Bank (ECB) exposure to the so-called PIIGS countries (Portugal, Italy, Ireland, Greece and Spain) as of April 2012 was 918 billion euro.
One way or another, the better off member-states of the EU within the eurozone have funded these vast sums. They are even less likely to be repaid if the people in the embattled economies shift their available euros to safer locations.
Presumably, the German and EU leaderships understand how serious the problem is for Germany. Less understood, however, is how to deal with it.
Germany is the largest economy in the EU — and the most prosperous. It is also the largest manufacturer and exporter. It has maintained these advantages, mainly because its exports powered on while the rest of Europe was turning down.
Some 60 per cent of total German exports find their way into the 27 member-states of the EU; 40 per cent of total exports have been absorbed by the eurozone — including by the profligate-spending countries.
Germany has accumulated large export surpluses. These have been used to fund German export sales in the same way as China financed US customers to buy Chinese. The Chinese, however, do seem to have handled it better.
Exactly how did Germany achieve this export domination within the eurozone? The economic restructuring of the German economy and labour markets, introduced by former Chancellor Gerhard Schroeder, certainly helped.
When interviewed recently by BBC business editor Robert Peston, in a British documentary that was re-broadcast on the ABC’s Four Corners program (June 11, 2012), Schroeder was right to say that his brand of restructuring, though unpopular enough to lose him his job, had succeeded in making Germany’s businesses and exports more competitive.
Even more important was the creation of the euro. When the single currency union was established, the question from the beginning was where to set the level of the euro. There were two considerations: where, in relation to the currencies outside the currency union, and where, in relation to the member-states joining the monetary union?
The aim was to try and set the level so that all the countries embracing the euro could trade competitively — not only with others within the eurozone, but also outside it — both within the European Union and with countries beyond Europe.
If the figure were set too high, EU member-states — even the most efficient (Germany) — would be uncompetitive with the rest of the world. If it were set too low, Germany would gain an advantage over the other EU countries.
Fixing a fair rate proved to be an impossible task, given that eurozone membership included countries of widely diverging economic strength and fundamentally different cultural histories.
As usual, power won over necessity. Germany managed to have the rate set low enough to preserve and enhance its competitive economic strength, which meant that for most of the rest of the eurozone, the rate was too high. This was especially so for the Mediterranean countries.
As a result, these poorer countries were flooded with German imports they really could not afford. Trade within the EU — especially for the countries on the euro — became hopelessly unbalanced. Germany’s enormous trade surpluses became the source of borrowings needed to sustain consumer standards of living in poorer countries and, ultimately, even the operation of governments.
Within the framework of a currency union these problems cannot be corrected without condemning Europe to decades of low growth. Even if the euro were to be discarded, re-establishing sustainable European growth would be difficult.
Whatever happens, dire consequences are in store for Germany. A break-up of the euro, totally or in part, will hurt the German economy.
If the imperilled economies revert to individual currencies, these will be seriously devalued against the euro. It will be years before they can import from Germany goods and services at anything like previous levels. Exports to the rest of the world won’t take up the slack — neither will the German domestic market.
The more the EU economies revert to national currencies, the worse will be the outcome for Germany. Worst of all could be a total collapse of the eurozone and a re-instated Deutschemark. The Deutschemark value would rise, relative to other countries, thereby undermining Germany export competitiveness — both in Europe and elsewhere.
Keeping the euro together won’t help either. On that basis, the indebted eurozone economies will face significant falls in living standards stretching far into the future. Even assuming the social consequences of this can be managed, imports will be reduced to bare essentials for decades.
So it is bad news for Germany whichever way one turns.
Is there a better or worse option? Possibly. A step back from the euro experiment, either totally or in part, might in the longer term be better for all, including Germany.
That approach would help maintain the common market and customs union elements of European integration. In addition, it would reduce the possibility of a European descent into social chaos.
Colin Teese is a former deputy secretary of the Department of Trade.
Satyajit Das, “Eurozone crisis is now about Germany”, The Drum Opinion (ABC), June 7, 2012.