Saturday, April 9, 2011


Germany and the euro: We don't want no transfer union
“Wherever there’s a fire in the euro zone, the financial firefighters rush
to the scene. That’s us,” jokes Oliver Welke, Germany’s version of Jon
Stewart, an American comedian. Although the IMF and European Union
are acting as co-rescuers of Ireland and Greece, Germans see
themselves as rescuers-in-chief—and they resent it.
Other Europeans see Germany as an arsonist. Angela Merkel, the
chancellor, has twice dithered, arguing about conditions for a rescue
even as the flames took hold. Her demand that creditors must share in
the losses triggered what is now being called the “Merkel crash”, which
threatens to engulf not just Ireland but Portugal, Spain and even Italy.
Luxembourg’s Jean-Claude Juncker, leader of the euro group of finance
ministers, frets that the Germans “are losing sight of the European
common good”. Spain’s problems start in Germany, wrote a Spanish
analyst in the Financial Times. Joschka Fischer, a former German foreign
minister, accused Mrs Merkel of bowing to “German domestic politics”.
There is more than a grain of truth in this. Germans were loth to give up
the D-mark in 1999 and have never warmed to the euro. In 2008, some
56% of Germans wanted the mark back, according to Allensbach, a
pollster. Despite the panic about Greece, that share was down to 47% in
April, but only a third of Germans had “great faith” in the euro. Mrs
Merkel, whose coalition government has so far disappointed voters, wins
plaudits when she takes a tough line against errant euro members and
scorn when she seems soft. Her Christian Democrats fear that a
demagogic D-mark party might emerge to steal votes.
German behaviour is guided by more than petty politics. In adopting the
euro the Germans thought they were joining a condominium, in which
every member would keep order on their own property, and not a messy
commune. Now the crisis threatens that understanding. The Greek bailout
and the €750 billion ($980 billion) war chest created in May to
defend the euro look to many Germans like a violation of the “no-bailout
clause” in the Maastricht treaty that created the euro. The
government insists it is not, because the aid is voluntary and temporary.
The constitutional court is evaluating this claim. The proposed successor,
a permanent facility plus procedures to impose losses on creditors of
insolvent countries, needs a treaty revision to pass constitutional
Mrs Merkel is struggling to balance demands for European solidarity with
German notions of responsible behaviour. Aid to Greece was coupled
with fierce budget cuts. Ireland will pay higher interest rates than
Greece for its €85 billion. “We still have the feeling that others have
done everything wrong, and we have done everything right,” says Peter
Bofinger, one of the five wise men who advise the government on
economic matters. Germany wants the remedy “to hurt so next time
they don’t do it again.”
Some measures proposed to calm the markets seem unthinkable to
many Germans. Mr Bofinger wants outstanding euro-zone public debt
converted into “Eurobonds” with collective responsibility. Yet rumours
that the government was contemplating a Eurobond drew rebukes from
the Free Democrats, the junior partner in the coalition. Holger
Schmieding, chief economist of Berenberg Bank, thinks governments
should guarantee the debt of any country that submits to an adjustment
programme approved by the EU and IMF. That looks like another nonstarter.
“Save Our Money!” a new book by the former head of the Federation of
German Industries, Hans-Olaf Henkel, suggests splitting the euro zone
into a hard-currency union led by Germany and a French-led southern
group that could devalue to regain lost competitiveness. But the notion
that Germany is poised to stalk out of the euro is far-fetched. Germans
may say they want the D-mark back, but fewer than a tenth see this as
a realistic possibility, says Allensbach. “People know what they have in
the euro and in Europe,” says Nikolaus Blome, Berlin bureau chief of
Bild, the loudest media voice of German disgruntlement. “Unlike in
England, there is no Europhobia in Germany.”
The Irish rescue has sparked little of the populist ranting directed at
lazy, early-retiring Greeks, who were told to sell their islands and the
Acropolis. Ireland had a dynamic economy and (at first) a balanced
budget. Its problems were caused by a burst property bubble and can be
solved, the Germans hope, by export-led growth. When Greece was the
lone outcast, it was easier to contemplate evicting delinquent countries
from the euro, as Mrs Merkel fleetingly proposed. It is harder to
envisage a mass expulsion of Ireland, Belgium and much of the
Mediterranean, whatever Mr Henkel may say. Although fewer than a fifth
of Germans backed a Greek bail-out in April, almost half now support the
Greek and Irish rescues, according to another poll.
The economy may be steadying German nerves. GDP is expected to
grow by 3.5% or more this year and by at least 2% in 2011. With
unemployment falling and wages expected to rise, consumption is at last
starting to pick up. Retail sales jumped by 2.3% in real terms in
October, suggesting that domestic demand may provide more thrust to
an economy that is overly dependent on exports. That should help the
rest of the euro zone. When the economy is strong it is easier to believe
the politicians’ mantra that Germany is the euro’s main beneficiary. Little
as they like fighting fires, Germans do not want their own economy
consumed in the flames.

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