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Tuesday, April 02, 2013

While Germany is accused of domination its taxpayers feel increasingly vulnerable

Writing in the Sunday Telegraph, Open Europe Director Mats Persson argued that, while Germany has emerged as the “chief villain” of the eurozone crisis in the wake of the Cypriot bailout, “It is easy to see why German taxpayers have had enough.” He added, “two vital pillars of Germany’s post-war policy — commitment both to Europe and to sound money – are now clashing head on. This is fuelling frustration…Perhaps it’s not surprising, therefore, that this month saw the launch of Germany’s first anti-euro party, Alternative für Deutschland.”

Read the full article below:
"In the running blame-game that is the eurozone crisis, Germany has now emerged as the chief villain. In many parts of Europe, the country has been outright blamed for the Cypriot crisis, which saw Berlin demand that Cypriot depositors be taxed in return for a €10bn bailout.

A commentator in Spanish daily El Pais went the furthest. “Like Hitler,” he wrote, “German Chancellor Angela Merkel has declared war on the rest of Europe.”

The piece was quickly withdrawn but the damage had been done. In Britain, commentators across the political spectrum have lined up to criticise Germany. The New Statesman recently labelled Merkel “the biggest threat to global order and prosperity” - ahead of notorious dictators such as Iran’s Mahmoud Ahmadinejad and North Korea’s Kim Jong-un.

Most comments have been far more level-headed but anti-Germany sentiments have reached levels not seen in a long time. Within Germany itself, however, the decision to tax Cypriot depositors continue to enjoy wide-ranging support, as does the wider austerity-driven approach to the crisis.

What’s more, many Germans would echo the country’s justice minister, Sabine Leutheusser-Schnarrenberger, who called on the EU to “also display solidarity with us and defend the Germans against unjust accusations”.

So are the accusations levelled against Germany unjust? Clearly, to consider taxing smaller Cypriot depositors — pensioners, unemployed, students — was an enormous mistake. Even though it was the Cypriot government itself, not the Germans, who insisted on spreading the burden beyond the larger depositors, it was obvious that it was too politically explosive to stand and that Germany would get the blame. Mrs Merkel’s government should have seen that one coming.

However, leaving aside that blunder, it is easy to see why German taxpayers have had enough. Throughout this crisis, risk has constantly been transferred away from private creditors on to the balance sheet of taxpayer-backed institutions. After two bailouts, Greece’s public debt is now around 70 per cent owned by eurozone taxpayers, with investors and banks largely let off the hook.

This is particularly hard to swallow in Germany as it comes down to broken promises. In the 1990s when the single currency was forged, German taxpayers were given two cast-iron guarantees: you will never have to bail out another eurozone country, and the European Central Bank will never enter the realm of politics by propping up insolvent governments.

To reassure the Germans, a “no bailout” clause was cemented in the EU treaties, explicitly stating that one eurozone country “shall not be liable for” the debt of another. Time and again, the Germans were also promised that the European Central bank would be the heir to the universally trusted Bundesbank.

“There is no bank in the world as independent from politics as the European Central Bank”, said Wim Duisenberg, the first president of the ECB, at the time.

Some 15 years and several bailouts later, German exposure through various loans and liabilities to weaker eurozone countries — including via the ECB’s government bond-buying programme - tops a nerve-rattling €1 trillion.

With Cyprus, the German government finally drew a line in the sand. Wary of dragging the electorate kicking and screaming into yet another hugely unpopular bailout, Berlin was determined to let Cypriot banks, not German taxpayers, pay most of the bill.

Germans are often accused of being obsessed with seeking to export their rules-based system for trade, taxation and spending — “Ordnungspolitik” — to the rest of the EU. This, critics say, lead to an unhealthy emphasis on austerity, locking the Mediterranean into high unemployment and permanent recession.

However, though the debate about when and how deep to cut is legitimate, the basic premise behind a rules-based order is one with which many Brits would sympathise. There are three main factors driving Germany’s attempt to instil this, and none of them is about seeking domination.

First, whether involving government or banks, the actual risk-takers must be made liable. If the bill for the mistakes made by banks or governments is constantly passed on to German taxpayers, what incentives are there for reform and to avoid even greater costs to German taxpayers down the road?

Cyprus sits on one the most bloated financial sectors in the world, seven times larger than the country’s entire economy. Foreign wealth was lured to Cyprus through generous interest rates and lax rules. It was a high-risk environment.

The head of the Eurogroup and Dutch finance minister Jeroen Dijsselbloem faced a barrage of criticism when he said last week that so-called “bail-ins” — forcing shareholders and large depositors rather than taxpayers to take the hit when banks fail - should become the norm in the eurozone.

The comments sent shockwaves through financial markets, as investors feared Spanish or Italian banks might be next in line, but were largely endorsed in Germany. Uncertainty around Cyprus was already plentiful so the timing was terrible, but the sentiment of the comments was absolutely right: “where [banks] take on the risks, [banks] must deal with them”, as Dijsselbloem put it.

The second driver is Germany’s own experience. It was the combination of rules and reforms that allowed Germany itself to rise from the ashes following the Second World War, and later to bounce back from the hugely complex reunification of East and West Germany. If it worked for Germany, why not for the rest of the eurozone?

Within the context of a monetary union, British commentators are right that there’s an element of inconsistency in this reasoning: the eurozone cannot consist of 17 Germanies (where would German exports go, for example?).

However, Anglo-Saxon scepticism over the single currency obscures a wider point: the German model of sound money and living within one’s means has a lot going for it. Some of the best-functioning economies in Europe — such as the Nordic countries — draw heavily from German economic thinking.

Swedish finance minister Anders Borg is arguably more suspicious of the eurozone’s habit of passing debt around — including from banks to governments - than are even the Germans. Sweden remains a rare success story of how to deal with bust banks.

But there is also a third, and more fundamental, reason why the Germans fear the prospect of perpetually underwriting the rest of the eurozone: they can’t afford it. Though we like to think of Germany as an economic power-house, according to a new Bundesbank study the assets of average households in Spain and France are significantly higher: €285,000 and €229,000 compared with €195,000 in Germany. In addition, as German politicians are keen to point out, if “implicit debt” - such as the liabilities of social security systems - are taken into account, the real level of Germany’s debt would be 192 per cent of GDP — much higher than Italy’s 146 per cent of GDP.

Germany faces a demographic time bomb. By 2050, the country’s current population of 82 million will have declined to around 70 million - less than the population in 1963. Far fewer will have to work for many more to finance the country’s pay-as-you-go social security system.

This deep-rooted sense of lingering economic vulnerability, alongside a genuine belief that Europe must learn how to live within its means, is driving Germany eurozone policy, not the desire to dominate Europe that some claim.

Regardless, it is clear that two vital pillars of Germany’s post-war policy — commitment both to Europe and to sound money - are now clashing head on. This is fuelling frustration. As the German tabloid Bild put it, as thanks for coming to the rescue of others Germans are met with “criticism and even open hatred”.

Perhaps it’s not surprising, therefore, that this month saw the launch of Germany’s first anti-euro party, Alternative für Deutschland. According to a recent opinion poll, about 26 per cent of Germans say they “could imagine” voting for such a party — with a disproportionally high share amongst first-time voters."


Rik said...

1. Do you really find that Dijsselbloem's timing was that awful?
Seen in the whole process of things that still have to be done probably his timing was not that bad imho. (His probably better replaced by the and timing by time, as timing assumes some kind of plan).
My point is that especially Italy and Spain are basically doing nothing. One has no government and the other one acts that way. They have to be woken up one way or another. Apparently the only way is pressure. Well this puts pressure on them (via their bankingsector). They cannot wait for another year, which they likely would do without pressure.
The whole EZ starts to look more and more like Japan (only without properly working/exporting companies down South.

2. On AfD. They really get a lot of media attention and merged with some other groups. Which is pretty good. As was their leader being close to being abused by a CSU dinosaur. No better PR than being hated by someone that a lot of people despise.
They look to be around the 5% hurdle (or even over it), so become a more realistic alternative.
Those are the positives. The negatives their leader. And their positioning. They basically get votes from all over the place, both CDU and SPD. A bit of the Grillo problem. It is strategically much better to have them from one side. That way change happens already because of the polls. Like the UKIP or Wilders in Holland. These parties put things on the agenda because traditional parties have no choice.
In Holland VVD countered, CDA didnot, VVD became the largest party CDA became midsize. Cameron changing policies because of that pressure.
AfD looks more right by nature, but a lot of votes are to be got with the SPD.
From the other side that makes extending your programm like Farage did cleverly much more difficult. Probably the mix Wilders in Holland is taking will give the best result. Anti-Euro, anti-immigration, social conservative, keep the welfarestate in tact. Kills the economy probably but has the best electoral chance. Anyway they have to profile themselves a bit more on this in electiontime with those discussions you need to have answers on most questions at least.

jon livesey said...

Two points. One, it is not "anti-German" to criticize German policy. Germany is following policies that are perpetuating the crisis.

The basic crisis is not one of debt, but of economic divergence. The periphery lost competitiveness versus the core by allowing unit labour costs to rise too far.

To deal with this and close the gap, either the core has to follow more expansionist policies or the periphery has to adopt internal deflation, or a combination. By insisting on austerity and refusing to reflate the core, Germany is imposing all the pain of readjustment on the periphery.

What is worse, it isn't even a zero-sum game. By imposing austerity on the periphery, Germany guarantees that domestic demand in the periphery declines, with the result that periphery demand for German goods also declines. In fact, intra-euro exports as a whole is now back to 2008 levels. German policy has hurt the euro-area as a whole, including Germany.

And the really sinister thing is that resent developments in the crisis have been caused by solutions to earlier phases. Cyprus Banks are insolvent because they bought Greek debt, which defaulted. If Germany keeps the euro area in recession, Banks which have lent to industry will become insolvent. If Italy restructures, it will destroy the French Banking system.

The second point is easier to state. It simply does not matter what promises were made to Germany. The crisis happened anyway.

Jay said...

Rik, I think you're being unfair to Italy's companies at least (don't know anything about Spain. Italy has lots of good small - exporting - companies SMEs. They are just completely clobbered at the moment, taxed to the eyeballs, demand and sales are gone, credit has dried up and the politicians are fiddling while the country dies on its feet.. I'm with Grillo on this at least, but what he is doing isn't really helping.

Denis Cooper said...

Germany is supposedly a democracy, and therefore the Germans should grow up and accept responsibility for the mistakes made by the politicians they freely elected.

Mistakes such as letting Italy into the first wave of the euro purely on political grounds and against strong economic advice, and the same with Spain and Portugal, and then allowing Greece into the euro knowing full well that Greek politicians had cooked the books, and the same with other countries that they wanted sucked into the euro as quickly as possible, and getting the rules bent to excuse Germany for its excessive budget deficit, and finally for agreeing to an bailout of Greece despite having said again and again that any such bailout would be illegal under the EU treaties.