Merkel's International Isolation World Turns to Unwilling Germany to Save the Euro

The euro is in trouble and only Germany can fix it. That appears to be the consensus as Chancellor Merkel attends this week's G-20 summit in Mexico. So far, she has stubbornly opposed most crisis solution proposals coming from Brussels. But the risks are now so great that she may soon have to backpedal. By SPIEGEL Staff

White House via CNP/ DPA

There will be several issues on the agenda when the heads of the 20 leading industrialized nations meet in Los Cabos, Mexico on Monday; the fight against youth unemployment, protecting the global environment and free trade. These are all problems that are of "critical importance," and not just for German Chancellor Angela Merkel.

But the chancellor knows that, once again, all of these issues will be swept aside and the discussions -- during meetings and dinners alike -- will focus primarily on the euro.

"Let's not kid ourselves," Merkel said with a sigh in German parliament last week. Europe's debt crisis will be the "central topic" of the summit meeting, as has so often been the case in recent months. Even worse, the German chancellor will face a united front against her.

Since the euro crisis has escalated, the chancellor has been more isolated than ever before. Everyone, from US President Barack Obama to French President François Hollande, British Prime Minister David Cameron to Italian Prime Minister Mario Monti, together with an army of international economists, financial experts and journalists, is demanding that the Germans take on a greater financial burden. There is talk of a "bank union," a "debt repayment fund" and, as has so often been the case in recent years, a communalization of debt in the form of euro bonds. Without them, the anti-Merkel alliance warns, there is no way to stop the debt crisis.

The crisis came to a dangerous head last week. The recent bail-out plan for Spanish banks, long delayed by Prime Minister Mariano Rajoy, failed to calm the financial markets. The risk premium on bonds issued by Madrid and Rome are rising rather than falling. And Greece, despiteconservatives having won the election over the weekend, could still withdraw from the euro zone.

'Europe Is Dead'

For the first time, senior officials in Berlin are openly discussing the possibility that the euro could fall apart. Europe, warns International Monetary Fund head Christine Lagarde, has but "three months" to save the euro. And a senior euro-zone diplomat in Brussels warns: "If Germany doesn't make a move, Europe is dead."

Merkel's options, though, are limited. Germany already has billions of euros invested in preserving the currency zone. About two-thirds of German voters are opposed to Berlin taking on further risks, and the coalition government of Merkel's center-right Christian Democratic Union (CDU) and the pro-business Free Democratic Party (FDP) is increasingly reluctant to impose new financial burdens on taxpayers. "Anyone who wishes to go that far," Horst Seehofer, the chairman of the conservative Christian Social Union (CSU), told SPIEGEL, "will have to ask the German people first."

It's easy to predict what the answer would be. If euro bonds were introduced, for example, countries like Italy and Portugal could take on large amounts of new debt without having to fear effective monitoring of their government spending. This helps to explain why the proposal is so unpopular in Germany. If debts were shared, says Jens Weidmann, the head of Germany's central bank, the Bundesbank, "liability and control would have to be in conformity with one another."

That, though, is exactly what is missing from the rescue proposals currently making the rounds in European capitals. On the contrary, plans for European-wide deposit insurance or joint debt repayment funds would indeed limit the liability of donor countries. But they would also impose new burdens on the Germans without solving the problems of the crisis-ridden countries.

This is true, for example, of the proposal by the German Council of Economic Experts to establish a European debt repayment pact. The idea has a growing number of fans. Germany's Social Democrats and Greens support it, as does the European Parliament and the European Commission. Even publications like the Economist see it as a better way forward.

Almost No Relief

In actuality, however, it is the wrong way to go. The proposal envisions euro-zone member states becoming jointly liable for debt accumulated beyond the threshold of 60 percent of a country's gross domestic product. This debt, which currently totals €2.3 trillion ($2.9 trillion), would be transferred to a joint fund. The result would be rising interest rates on the sovereign bonds of solvent nations like Germany and falling rates for those countries most affected by the crisis. At the same time, every country would commit itself to paying down its share of the fund in the course of 20 to 25 years.

The proposal sounds like a way of applying the principle of solidarity to debt repayment. In fact, it hardly goes beyond what European countries have already agreed to with respect to debt reduction. Worse, it provides almost no relief to most of the debt-ridden countries, while weakening Germany at the same time. Its advantages, on the other hand, are concentrated almost entirely on those countries that have accumulated huge piles of debt and are paying high interest rates: primarily Italy, in other words.

The country has a debt ratio of 120 percent, the third-highest of all industrialized countries. The plan under consideration would mean that Rome could shift half of that total into the shared euro debt fund. It would save a lot of money as a result, because interest rates on its debt would presumably fall. On the other hand, Italy would have less incentive to introduce reforms. That Rome tends to react to interest rate reductions with lethargy has been proven several times in the past.

When it comes to Spain, on the other hand, a debt repayment fund would do little to mitigate the country's immense problems. Although the country has high borrowing costs, it is not insolvent. The ratio of government debt to GDP was only 70 percent in 2011, which is significantly lower even than Germany's.

This means that Spain could only transfer a small share of its debts to the shared fund and, with a little luck, save a few billion euros a year -- a rather symbolic contribution to solving the crisis.

Nothing But Self Deception

The effect would evaporate completely with other ailing euro-zone members, like Portugal, Ireland and Greece, which have already taken advantage of low-interest loans through the bailout fund.

Consequently, no country but Italy would truly benefit from the debt repayment fund. But there would be a clear loser. Germany would have to move close to €600 billion of its debt to the fund, for which its borrowing costs would be considerably higher than today. In light of the historically low interest rates for government bonds, the additional costs would quickly amount to more than €10 billion a year. During the 20-year lifespan of the debt repayment fund, Germany's losses could add up to €100 billion or more.

In short, the debt repayment pact would weaken the strongest member of the monetary union without strengthening its weakest members. It could, in fact, ultimately achieve the opposite of its intention, further destabilizing the euro zone.

Furthermore, one can't help but wondering if it is even necessary. The so-called debt repayment fund doesn't require much more from the member states than the fiscal pact, to which 25 of the 27 EU countries have long since agreed. In it, they pledge to reduce their debt in 20 equal increments to 60 percent of GDP. If all members abide by the agreement, they will achieve the same goal by the 2030s as they would achieve with the debt repayment fund.

A debt repayment fund is anyway nothing but self-deception as long as government budgets are not balanced. Regular budgets lack the funds to service the debt and holes would be plugged with new debt. A similar situation applied to the fund that was designed to bear the costs of German reunification. New debt simply replaced old debt. Debt can only truly be paid down in the case of budget surplus. But then, there is no need for a debt repayment fund, because debt is paid down automatically.

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KhanZubair 06/18/2012
1. World Turns to Unwilling Germany to Save the Euro
To me the European economy can be pulled back from the precipice if policymakers moderate austerity, put up the money to guarantee bank deposits, pledge for joint funds to recapitalise ailing banks and change the composition of public expenditure towards productive investment.
muley63 06/18/2012
2. Making the Perfect the Enemy of the Good
Germans need to remember their Voltaire, "“Don't let the perfect be the enemy of the good.” There is no time for a perfect solution...only less bad to catastrophic. I reject the assumption that there will be no change in high debt countries if a EuroBond is introduced. The idea that these countries will simply go on as before is a terrible assumption because no sane country will want to go through another Depression. Yes, this is a Depression for countries like Spain and Greece. No country ever remains unchanged after going through an economic depression. When the ENTIRE world says Germany needs to do something, than perhaps Germany NEEDS to do something. Even George Bush realized he could not allow US banks to fail. Nobody wanted TARP (Our save-those-bastard-banks-bailout). In fact, TARP failed the first time, but eventually passed because of the shock it produced in the markets. Thus, for German politicians to say, '...the people must have their say.' You are a coward. The 'people' voted you in to show some leadership and make decisions on their behalf. If that's the function of politicians in Germany than you are no better than a poodle. Spiegel should be ashamed of the position they are taking during this crises. All their articles promote the moral rightness of the German position and how much German 'may' be liable. However, this article is better than most because of a couple of paragraphs where it explains that if the Euro fails, the cost will be ten times the cost of a Eurobond. This should be emphasized, but it is buried pass the half-way point of the article. Moreover, Spiegel should examine how Germany's export economy did before the Euro. I did and there was no export economy. This was during the reunification stage, but even before the 90's, the export account was heading toward negative. Not only will Germans lose billions if the Euro goes kaput, German will lose the ability to restore their economy. This is a really dangerous game Merkel is playing.
HoratioJones 06/18/2012
3. Fix the system, not the symptom
Asking Germany to carry a heavier load of debt could be part of the solution to a cyclical downturn, but the current crisis is more systemic than that. It's really a monetary problem and doesn't call for a fiscal solution. The EUR is currently designed to be almost like a gold standard. The gold standard was, of course, abandoned long ago because it was unworkable and inappropriate in the modern economy -- it can lead to unnecessary economic suffering. The ECB charter needs to be changed to fix the euro. That is, if the ECB were permitted to finance a State, then it could bring risk premia back down to reasonable levels. This would restore confidence and give a chance for fiscal measures to work. In this context, it would be important to have some sort of fiscal oversight to ensure that countries did not abuse the situation.
awareadams 06/19/2012
4. Die Antworten!
Zitat von sysopThe euro is in trouble and only Germany can fix it. That appears to be the general consensus as Chancellor Merkel attends this week's G-20 summit in Mexico. So far, she has stubbornly opposed most crisis solution proposals coming from Brussels. But the risks are now so great that she may soon have to backpedal. By SPIEGEL Staff,1518,839481,00.html
Germany is not the answer, except to insist that other European countries, include France, submit plans to put their own houses in order. Only then, can a central bank Euro (like the U.S. federal reserve) be created. Here's the simple of it: in the U.S. when a company or concern (or country) is insolvent and not able to pay its bills on time, it may file in court for a "Chapter 11 Re-organization". When it does so, the debtor, working with a creditors' committee, must submit a "plan" of reorganization. The plan always involves an arbitrary reduction of debts due creditors, plus reforms in the business such as cutting labour costs, and getting rid of non-productive operations. By doing this, the debtor shows the creditors (and court) that once re-organized it may resume business, earn a profit, keep employees, and pay its debts. The European countries do not yet want to submit such plans because they are timid and afraid to deal with local political considerations, including labor unions, people on pensions etc. Germany is on the right track: once France, Spain, Italy and Greece produce viable plans to reorganize so that they may pay their way and not live off borrowed money, Germany will join them and the Euro may be saved. Absent such bona-fide plans, the Euro is broke and Germany needs a new Deutschmark.
Eleos 06/19/2012
5. Differences should not be denied
Markets have been trying hard to force a German capitulation, and still believe it is only a matter of time. Any weakening of resolve will encourage more of the reckless speculation by hedge funds that is one of the major causes of the crisis. The losses in euros which will accumulate if Germany leaves the Eurozone must be balanced with the increase in the value of assets in devalued euros. If Germany were to leave with Austria, Finland, Holland, and one or two of the formerly communist states it would give the block more bargaining power in the difficult negotiations to follow. Many nations have taken advantage of undeservedly low interest rates over the last few decades to borrow beyond their means. The prudent solution is a temporary reduction in living standards so that more resources can be devoted to repayment of these debts. It is no coincidence that most of these countries are steeped in corruption and will continue to vote for politicians they hope will be able to blackmail or coerce the prudent nations of northern Europe to share their debts. They are reluctant to vote in politicians who promise a reduction in living standards, so the present course is not going to work. The solution is the one that has been tried and tested many times: let inflation reduce the real value of the accumulated debts. This will be possible when the Eurozone is restricted to those countries who all share the same problem of unsustainable debts. The new ECB will immediately increase the money supply, the markets will price their obligations, and all will be rosy again in a couple of years. The lesson must be that contrary to what has been indoctrinated in the post war period, namely that the peoples of all nations are the same and to say otherwise is racism, is plainly false. It is true that an exaggerated sense of nationalism was one of the factors leading to the disastrous wars of the last century, but denying something as evidently true as the inherent differences in qualities and talents of peoples as a result of inheritance so as to avoid some of its extreme consequences, is stupid.
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