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
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.
- Part 1: World Turns to Unwilling Germany to Save the Euro
- Part 2: What a Euro Break-up Would Mean for Germany