Merkel's International Isolation: World Turns to Unwilling Germany to Save the Euro
Part 2: What a Euro Break-up Would Mean for Germany
The "bank union" idea promoted by European Commission President José Manuel Barroso -- in which lenders would be supervised throughout Europe -- follows a similar melody: First communalize the debt and talk about the consequences later. Barroso also hopes to merge national deposit schemes into a single Europe-wide fund. Experts from the European Central Bank (ECB), the European Commission and the Euro Group are expected to develop concrete plans in the coming weeks.
Despite a lack of details, such proposals have already been the source of great turmoil, particularly in Germany. Opponents fear that German taxpayers will ultimately be asked to pay for problems in other countries, but without being able to exert real influence on those countries' banks. Michael Kemmer, managing director of the Association of German Banks, says that this is the "wrong track" for Europe. Sabine Lautenschläger, vice-president of the Bundesbank, points out that when there is a crisis in a national banking system, "it may be necessary to use the money of taxpayers in other countries." In other words, in a worst-case scenario German citizens could be forced to bear the costs if a Spanish bank collapses.
The problem was solved through guarantees issued by the German Special Financial Market Stabilization Fund (SoFFin). Merkel and then Finance Minister Peer Steinbrück issued a guarantee that deposits with the bank were safe.
But what happens if a European deposit insurance fund runs into similar problems? Will Merkel have to issue a general guarantee for all of Europe?
Not an Alternative
The politicians tasked with saving the euro couldn't be facing a greater dilemma. Their plans for a European debt or bank union are half-baked. And to issue euro bonds at this point would stretch Germany's capabilities too far, Chancellor Merkel warned last Friday.
But abandoning the euro is also not an alternative. The costs would be too high, not least for Germany. According to calculations by Jens Boysen Hogrefe, an economist at the Kiel Institute for the World economy (IfW), the financial risk amounts to about 1.5 trillion. The greatest share of that risk likely lies with the Bundesbank. Within the framework of the ECB payment system, the Bundesbank has accumulated claims amounting to about 700 billion, of which it could probably only recoup a small portion if the euro fails. German Finance Minister Wolfgang Schäuble would have to give up for lost up to 100 billion in bailout funds promised to countries like Greece, Portugal and Spain.
It would be a disaster for German banks. At the end of last year, they had about 800 billion in bonds of other euro countries in their portfolios, and they had also issued loans to banks and companies in those countries. The IfW believes that the German banks have drastically reduced these inventories in the last few months. No one knows how much the remaining contents of the portfolios would still be worth if the monetary union were to break apart. German insurance companies and other businesses are also exposed in other euro-zone countries to the tune of an estimated 300 billion.
In addition to financial perils, there are also economic risks that are difficult to compute. IfW experts believe it is possible that a new deutschmark would gain 30 percent in value against other currencies in the first year, in the event of a euro crash. This could lead to a 12 percent decline in German exports and a drop in economic output of more than 7 percent.
Germany sovereign debt would increase substantially due to the need to write off aid to the crisis-ridden countries and to bail out banks, insurance companies and many other businesses. "As far as debt goes, we could quickly reach the current Italian level," says Boysen Hogrefe.
No wonder, then, that top German business leaders are alarmed, including the Federation of German Industries (BDI). "Germany is the most important economy in the euro zone and the EU, which also makes it the most critical to the system," states an internal presentation for the BDI steering committee. According to the document, German companies have accumulated substantial assets abroad in recent years, including shares in companies, receivables and government bonds. These assets would be at stake if the monetary union broke apart. German assets abroad are "highly exposed and, with respect to their intrinsic value, dependent on external stability," the document reads. "In relative terms, Germany and its industry would suffer the greatest losses should the euro zone fail."
In the presentation, the BDI appeals to the government to do more to save the euro, and it also holds out the prospect of assistance. The euro zone, according to the BDI, needs a "burst of investment and growth, which German industry and politicians must organize."
The most recent idea coming from Brussels consists in making a light version of euro bonds, so-called euro bills, palatable to Germany. Euro bills would be common European bonds with short maturities and limited volume. Under the concept, each country would be allowed to use euro bills to borrow money up to a certain percentage of its economic output. Any country that breaks the rules would be excluded from trading in the securities in the following year. European Council President Herman Van Rompuy, European Commission President Barroso, Euro Group Chairman Jean-Claude Juncker and ECB President Mario Draghi hope that their model will convince the German government, which has rejected euro bonds until now. Because the new euro bills would be limited in terms of face value and maturity, officials in Brussels believe that the securities could be compatible with the German constitution.
If the concept is implemented, it would provide euro-zone leaders with a bit of breathing room. But it would also increase German borrowing costs. Still, the pressure on Chancellor Merkel will not diminish. The endgame of German liability has begun.
Translated from the German by Christopher Sultan
- Part 1: World Turns to Unwilling Germany to Save the Euro
- Part 2: What a Euro Break-up Would Mean for Germany
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