Friday, 30 August 2013

Germany's conondrum

This article was published in The Malta Independent on Sunday - 25th August 2013

You might think that what is happening in Germany is strange. It is not.

Since the 2008 financial crisis, electorates in countries far and wide, given a chance to vote, have blamed incumbent government and sent them to refresh in Opposition.

This happened not only in countries that needed a bailout as in Greece, Ireland, Portugal, and Cyprus, where electorates were feeling the pain of austerity programmes imposed on them as part of the bailout conditions. It even happened in Italy and Spain where, to avoid formal bailout, governments had to take initiatives to adopt austerity measures to avoid a bigger evil. It also happened in other countries like UK, France and Malta that were affected by the recession caused by the crisis but did not come anywhere near requiring external bailout assistance.

In contrast, Germany’s election scheduled for 22 September is dominated by voters’ apathy. The euro crisis does not even feature prominently on the agenda, and the outcome uncertainty is simply whether Chancellor Merkel will succeed in continuing in coalition with her buddies from the FDP or will be forced to seek a grand coalition with her opponents in the SPD, with or without the participation of the Green Party.

Why is Germany different from the rest?
There is a very simple explanation to this. Germany is enjoying the euro crisis and has been a major beneficiary of the euro crisis. No wonder that Germany has shown no inclination to find a lasting solution to the crisis but has done just the minimum needed to keep the euro system together and avoid disintegration that would follow if any country were forced to exit the single currency union.

Germany has done just enough to keep the sick members alive but not enough to actually heal them and get them out of the sick bay. Not only Greece, that was and still is (economically speaking) chronically ill, but also Italy, Spain, Portugal, Ireland and Cyprus are still mired in a never-ending recession. One should ignore economists’ mantra that the recession has ended purely because growth of 0.1 per cent has been registered this last quarter. You would not consider yourself healed if instead of running a temperature of 41 degrees you register a drop to 40.9!

The election campaign in Germany exposes all that is wrong with democracy in the EU. We have come to a situation that given Germany’s dominance over the EU decision-making systems, the Chancellor continually faces a conflict of interest. What is good for Germany is not necessarily good for other EU countries, especially those locked in the euro, and Germany blocks what is good for other countries. This democratic deficit reaches acute dimension in the run up to an election.

Chancellor Merkel should be explaining to the German electorate that the current situation is unrealistic and unsustainable, that deficit countries cannot redeem themselves without the adjustment process being spread to include the surplus countries, that without burden sharing to recover equilibrium, countries in distress will at some point unavoidably give up on the painful restructuring process and distressed electorates might even give up on democracy altogether, electing demagogues from the extreme left or right. Italian elections were a near miss last time round!

Yet little of this features in the German election campaign and the German electorate is being deceived into believing that Germany can thrive as other euro countries experience a whole generation of chronic youth unemployment.

In spite of desperate efforts to keep the euro crisis off the election agenda, with the complicity of the SPD Opposition, who probably realise that electoral popularity and unpleasant hard truth are mutually exclusive. This week the German Finance Minister Schauble was forced by the media to reluctantly admit that Greece will soon need a further bailout if it is to avoid default.

Greece needs a lot of things but surely one thing it does not need is yet another bailout based on fresh debt. Even after the 70 per cent haircut on private sector debt deceitfully labelled as voluntary in 2011, Greece still has the highest debt to GDP in the eurozone at 180 per cent and among the highest interest cost to government revenues at nearly 11 per cent. Compare that to Malta’s 72 per cent and 8.3 per cent respectively.

Schäuble, a senior member of the CDU, said at a campaign event on Tuesday morning that Greece would need more financial assistance beyond the €230 billion it has already been promised to keep it solvent till the end of 2014. It was the first time a member of Merkel’s government had explicitly said that more aid would be necessary, though there had been plenty of speculation to that effect in the media. But the Bavarian sister party to Merkel CDU was particularly adamant in rejecting further assistance for Greece. The Chancellor was quick to distance herself from Schäuble’s comments, saying that the issue won’t be broached until next year.

In other words, let’s avoid the truth for now and we will wake up the Germans to reality but only after the elections.

Germany has so far saved some €40 billion from its debt servicing costs as the crisis forced a flight of capital to the safety of German government bonds which saw their interest cost fall to record lows as other countries had to pay record high interest to borrow, if they could borrow at all. Germany also benefited from the euro crisis in that the euro remained much weaker on the exchange markets than would have been the case if Germany still had its own national currency. The Deutsche Mark would have sky rocketed on the foreign exchange markets and would have acted as a self-correcting mechanism to neutralise Germany’s increased competitiveness and accumulating surpluses. With the euro, the German export machine does not face any headwind from the exchange rate mechanisms.

When the euro was originally conceived between Chancellor Kohl and President Mitterand, it was a quid pro quo by Germany accepting to give up its own currency for France accepting to integrate the former East Germany as one Federal German unit inside the EU. Events have proved Mitterand diametrically wrong. Not only did the single currency not tame Germany’s economic strength, it actually delivered a means to dominate other weaker countries locked inside the monetary union.

But after the elections, Germans will realise that they cannot have their cake and eat it.

Monday, 19 August 2013

Look who's saying it now!

I have been repeating it all along:  Germany is enjoying the Euro crisis.

It has been a great beneficiary of the Euro crisis both through reduced cost of servicing its national debt ( as the crisis raised interest costs to problem countries and reduced them to strong surplus countries) as well as by registering strong economic growth leading to strong balance of payments surplus and low unemployment.   Germany benefited from a weak Euro in a way it would not have been possible to do if it still had its own Deutsche Mark which would have shot sky high to reflect the country's strong status and act as a self-correcting mechanism to address the structural surplus.

But the now the Germans themselves are saying it.   See this report in today's Der Spiegel:

SPIEGEL ONLINEProfiteering: 

Crisis Has Saved Germany 40 Billion Euros

Germany has profited from the euro crisis to the tune of 41 billion euros in reduced interest payments. Strong demand for its debt has cut yields and made it cheaper for Germany to borrow. Meanwhile, the crisis has only cost Germany a mere 599 million euros thus far.

Germany is profiting from the debt crisis by saving billions of euros in interest on its government debt, which has enjoyed a steep drop in yields due to strong demand from investors seeking a safe haven.

According to figures made available by the Finance Ministry, Germany will save a total of €40.9 billion ($55 billion) in interest payments in the years 2010 to 2014. The number results from the difference between actual and budgeted interest payments.

The information was released in response to a parliamentary inquiry from Social Democrat lawmaker Joachim Poss.

On average, the interest rate on all new federal government bond issues fell by almost a full percentage point in the 2010 to 2014 period. Financial investors regard Germany as a particularly safe creditor because of its solid state finances.

The interest rate savings combined with unexpectedly high tax revenues generated by the strong economy  have also led to a decline in new borrowing. Between 2010 and 2012, the German government issued €73 billion less in new debt than planned.

The Finance Ministry is trying to maximize the benefits of the low interest rates by placing more longer-term bonds at favorable rates. Between 2009 and 2012, the proportion of short-term debt issues with maturities of less than three years fell to 51 percent from 71 percent.

According to the Finance Ministry, the costs of the euro crisis for Germany have so far added up to €599 million.

Pity that during the German election campaign the Euro problems and Germany's role in solving them are not on the agenda as Germans are being led to believe that they can continue to enjoy the crisis in perpetuity as others countries, at the other end of the spectrum, are stuck in an eternal crisis from which they cannot get unstuck unless the burden of adjustment is equitably shared between surplus and deficit countries alike.

Soon after the elections, whether it would be Merkel on her own or with a grand coalition with the SPD, Germans must wake up to reality that unless they do whatever it takes to save the Euro, they have most to lose.

Monday, 12 August 2013

The bridge that Gozo needs and other matters

This article was published in The Malta Independent on Sunday - 11th August 2013

Gozo needs a bridge of steel or concrete as much as anyone needs a hole in the head. Those who dream that any such fixed connection between the two main islands could be economically and financially feasible are probably presuming that the country will have ample resources to spare through discovery of limitless reserves of oil and gas and that like Qatar, we will have problems devising ways in which to spend it all. On that assumption we can just as well start preparations for hosting the 2026 World Cup.

Even if such a connection were to be financially and economically feasible, I doubt whether it would address the basic problem that is making Gozo’s economy unsustainable. Would young people who cannot find work in Gozo continue to live there because they can commute quicker and easier with a fixed connection than with the ferry service? I doubt that very much, and the lure of relocating closer to where they work will remain; with a bridge as much as without it.

And if Gozo becomes as accessible as Mellieha, causing occasional visitors to lose the experience of the ferry crossing, would Gozo retain its attraction for day visitors and home tourism?

Gozo needs a bridge but not one made of concrete and steel. It does not need an underwater tunnel, which would have to start its descent from Burmarrad and hopefully re-emerge before the land runs out at l-Ghasri. Gozo needs economic bridges.

It needs an economy that can sustain a much bigger population so that increased job opportunities in Gozo would make relocating to Malta a real option not an economic necessity. With a population density slightly more than one - third that of Malta, there is ample scope for a 50% increase in the Gozo population, from 31000 to say 47000 and still have a population density half that of Malta. With sensible planning, Gozo can absorb this population increase and retain the greenery and scenery nature endowed it with.

Rather than spend crazy amounts of money to make it easier for residents to commute, an economic bridge would make it possible for residents to avoid being forced to commute. The economic bridge will consist of whatever it takes to convince 16000 additional persons to become bona fide residents of Gozo with a large portion of this being in a category of retired persons who are not economically active but who prefer to enjoy their retirement in a prettier and more peaceful location, especially if they can enjoy some fiscal incentives for doing so.

A permanent increase in Gozo’s population within the limits indicated will boost economic activity and give the Island the necessary economies of scale to sustain job and entertainment opportunities as well as health and education services comparable to those in Malta, thus increasing the attraction of Gozo as a retirement place for locals and foreigners alike. A larger pool of employment resources will persuade investors to locate their back-office-type projects in Gozo in the knowledge that their investment in training Gozitan employees will be rewarded by stable and loyal performance of those who pursue their career in Gozo rather than stay on permanent lookout to relocate to Malta as quickly as they can escape their parents’ grip.

Any investment in unthinkable millions to build a fixed link will egoistically benefit the current Gozo commuters but prejudice the attractions of Gozo itself as much belittle opportunities for those who aspire for Gozo to reach economic sustainability by building on its attractions and uniqueness rather than becoming just another place in the Maltese islands.
German Chancellor Merkel‘Other matters’ relate to the unreal complacency that has befallen the Euro monetary system as it is being kept – artificially – together until the German elections, due on 22 September, become history. Three separate economic reports I read this week all discuss the tempest that may hit after this false summer lull.

Under the title “Germany dozes on a volcano” Der Spiegel wrote:

Angela Merkel's government is forcing Southern Europe to undertake profound reforms while at the same time denying its own responsibility for the consequences of its crisis policies. Germany is risking a historic failure with its shortsighted wrangling...

Germany is playing with fire, pretending that democracy in Euro Countries in distress can co-exist with a never-ending recession and with permanent double-digit unemployment, which reaches atrocious levels among young people.

An economic study by a large European Bank this week argues that in spite of all the harsh austerity that Greece has been subjected to Greece’s debt burden clearly remains unsustainable (in spite of the debt forgiveness suffered by private Greek Bondholders in 2011 through wicked supposedly voluntary schemes) and significant debt reduction is still needed

Greek debt is now mainly to other EU countries that bailed it out, including Malta, and one would need a high dose of optimism to assume that we will ever manage to recover our loans without suffering substantial haircuts of capital and/or subsidy on the interest below what it costs us to borrow.

The report proceeds to state that Portugal’s debt is only sustainable “as long as continued funding support is provided (by the troika – EU, ECB and IMF) but there is a significant risk of unsustainable debt dynamics in the medium term.”

Finally, this week’s Economist leads with an article titled ‘What Angela isn’t saying’. It again argues that for all the austerity that Germany has imposed on Greece, Portugal and Ireland, the first three countries that requested bailout in 2010-2011, all three countries are still burdened by unsustainable debt levels – 175% of GDP for Greece, 125% of GDP for Ireland and 127% of GDP for Portugal. And all three countries are still grappling with a never-ending recession and horrendous unemployment levels. The Economist argues that this unsustainable truth is under wraps in “an orchestrated hush as Angela Merkel campaigns for a third term... Discord will re-appear after the poll, as it becomes clear that Europe’s bailout programmes won’t be unwound harmoniously and that more big bills are on their way.”

Germany today finds itself in the dangerous situation it was in between the founding of the German empire in 1871 until the Second World War, when in the words of a famous historian, Germany was "too weak to dominate the Continent but too strong to bring itself into line." After the election, Germany has to choose between solving the Euro problems through a Versailles model solution or a Marshall Plan solution. History should indicate where a wise choice lies.