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.


  1. "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." ... and so Germany has benifited HOW from the Euro crisis? Our "benifit" is no increase in living standards since 1995 (since the Euro's annoucement) precisely because the Euro has not appreciated as the DM would have. The undervalued EUR for Germany is not a benefit to Germany, it only benefits some owners of Export businesses. Overall, Germany has lossed deeply due to the Euro crisis: 1) low euro exchange rate making us poorer vis-a-vis ROW. 2) high losses in what was thought to be safe irish or spanish banking debt or italian sovereign debt 3) soon to come write downs of bail-out funds 4) etc.. and the argument that Germany profited from the crisis through lower borrowing cost doesn't count either: Germany is a net international creditor, so the lower interest on german bunds does not mean foreigners are giving Germany near-zero interest loans, but that German pension and insurance funds are lending at near-zero interest to the German government... i.e. the government's gain is the people's loss.

    1. If Germany were being disdvantaged by the Euro crisis they would have either decided to leave the Euro ( much easier for a surplus country to leave than it is for a deficit country) or else woul have tken measure to really solve the crisis by a fair burden sharing programme to recover equilibrium among the euro area members.

      For more deatield analysis see 'how to save the Euro' in the top line of this page