Chaos In Germany
From the BBC 20th February 2009, Germany’s finance minister said Germany might consider bailing out smaller European nations. Germany’s Finance Minister Peer Steinbrueck described the suggestion that the eurozone could fall apart as “totally absurd” and promised that if other member states got into trouble, “we will show ourselves to be capable of acting”.
Mr Steinbrueck’s comments strengthened the euro against the dollar. One euro was worth $1.2760 by late afternoon from $1.2511 on Wednesday.
Given the risks facing the Eastern European economies, if Berlin does decide to support them, that will weigh on [Germany’s] finances, said Yuji Saito of Societe Generale.
Many Eastern European countries have been in trouble in recent months amid the global financial and economic crisis, as their economies plummeted from boom to bust.
But the message of generosity to Germany’s neighbours has not yet travelled from the office of the Finance Minister Peer Steinbrueck (Pictured riding a scooter) as far as that of the President, Angela Merkel, whose chances or re-election would be damaged by any significant Euro bail-out. Germans are already angry at the burden of carrying the EU’s less fiscally responsible members.
BBC – German Chancellor Angela Merkel met EU Commission President Jose Manuel Barroso amid speculation that Germany may announce measures to help some other European economies.
But she declined to comment specifially on the matter saying after the meeting: “The eurozone has, in fact, proven its worth in this financial crisis.”
But Angela, will you be prepared to pay up to save the Euro? Warm words will not be enough. Cold hard cash will be required, and not a small amount either. The IMF is already fully stretched after bailing out Iceland, Hungary, Ukraine and others. Only German money will be able to stop countries from falling out of the single currency, or saving European banks close to collapse. What will you do about it?
Chaos In Poland
Poland’s finance minister said his country was considering adopting the single currency to help weather the downturn.
“Secure public finances and a quick adoption of the euro are the best way out of the crisis for Poland,” Jacek Rostowski told members of parliament.
But just as in Germany, in Poland too, the fine pro-Euro words of the Finance Minister are not yet on the lips of other financial authorities.
central bank head Slawomir Skrzypek said on Wednesday that Poland was not ready to set out on the path to the eurozone.
He cited the weakness of the zloty, which has dropped more than 12% against the euro since the beginning of the year.
Many Eastern European financial markets have been hit hard amid worsening economic data and an exodus of foreign investors.
The fact is that the future of the Euro will be decided in Germany in the end of the day.
If Germany decides to carry the burdens of the PIIGS (Portugal, Ireland, Italy, Greece and Spain) as well as Poland, The Czech Republic, The Baltic States and Hungary, then the Euro might have a chance of surviving a little bit longer before some of these countries either crash out of the Euro or begin to drag down the European banking system, and the Euro’s value with it.
But let’s face the reality. The German government failed to raise the cash it was seeking in a recent bond sale to finance its own cash shortage caused by the slump, with Germany being dependent on disappearing exports. How can Germany raise the kind of sums that would be needed to bail out the weaker economies of Europe, without threatening her own ability to survive the current economic storm?
It might take a while for this reality to sink in, but with Germany still not yet ratifying the Lisbon Treaty with Gauweiler’s and other legal challenges being taken seriously by the German Supreme Court on the basis that Lisbon threatens the German Constitution, and with her economy suffering a colossal slump in growth, it is eminently possible that Germany, now inhabited by a new generation that feels free from war guilt, might set a new political course. Germany unlike her Finance Minister might prefer to see the Euro disintegrate than be dragged down by it, and to redefine the future of Europe without the burden of ‘ever closer union’ on her shoulders.
It is in Germany that the timing of the Euro’s demise will be decided, and already there are clear disagreements amongst German politicians as to when reality will have to be faced. Where, I wonder, does Peer Steinbrueck imagine he can raise a few trillion dollars?
Two outline proposals are being considered. From Market Watch –
One option would be for countries facing insolvency to issue a bilateral bond, with a creditworthy country taking the loan and providing it to the distressed country. Another option would be a joint bond issued by creditworthy countries, as well as a rescue package led by the European Union.
Another idea has been put forward by George Soros in his recent piece (19th February 2009)
Eurozone Government Bond Market Needed
The euro suffers from certain structural deficiencies; it has a central bank but it does not have a central treasury and the supervision of the banking system is left to national authorities. These defects are increasingly making their influence felt, aggravating the financial crisis.
The process began in earnest after the failure of Lehman Brothers when, on October 12 , the European finance ministers found it necessary to reassure the public that no other systemically important financial institution would be allowed to fail. In the absence of a central treasury, the task fell to the national authorities. This arrangement created an immediate and severe financial crisis in new European Union member states that have not yet joined the euro and eventually it also heightened tensions within the eurozone.
Most of the credit in the new member states is provided by eurozone banks and most household debt is denominated in foreign currencies. As the eurozone banks sought the protection of their home countries by repatriating their capital, east European currencies and bond markets came under pressure, their economies sagged and the ability of households to service their debts diminished. Banks with large exposure to eastern Europe found their balance sheets impaired.
The capacity of individual member states to protect their banks came into question and the interest rate spread between different government bonds began to widen alarmingly. Moreover, national regulators, in their efforts to protect their banks, were unwittingly engaging in beggar-thy-neighbour policies. All this is contributing to internal tensions.
At the same time, the unfolding financial crisis has convincingly demonstrated the advantages of a common currency. Without it, some members of the eurozone might have found themselves in the same difficulties as the countries of eastern Europe. As it is, Greece is hurting less than Denmark, although its fundamentals are much worse. The euro may be under stress but it is here to stay. The weaker members will certainly cling to it; if there is any danger, it comes from its strongest member, Germany.
Germany is at odds with most of the world in its attitude to the current financial crisis but it is easy to understand why. It has been traumatised by its history during the 1930s when runaway inflation in the Weimar republic led to the rise of Hitler. While the rest of the world recognises that the way to counteract the collapse of credit is by expanding the monetary base, Germany remains opposed to any policy that might carry the seeds of eventual inflation. Moreover, while Germany has been a steadfast supporter of European integration, it is understandably reluctant to become the deep pocket that finances bail-outs in the eurozone.
Yet the situation cries out for institutional reform and Germany would benefit from it just as much as the others. Creating a eurozone government bond market would bring immediate benefits in addition to correcting a structural deficiency. For one thing, it would lend credence to the rescue of the banking system and allow additional support to the newer and more vulnerable members of the EU. For another, it would serve as a financing mechanism for co-ordinated counter-cyclical fiscal policies. Properly structured, it would relieve Germany’s anxiety about other countries picking its pocket.
How exactly? The only way would be to grant Germany powers to intervene directly in the affairs of the other Eurozone members. And they are going to love that.
The eurozone bond and bill markets would complement but not replace the existing government bond markets of individual states. They would be under the control of eurozone finance ministers. The regulation of the financial system would then be put in the hands of the European Central Bank while the task of guaranteeing and, when necessary, rescuing financial institutions would fall to the finance ministers. This would produce a unified and well supported financial system within the eurozone.
Even the UK, which is struggling with an oversized and undercapitalised banking system, may be tempted to join.
Yes. How attractive it would be to come in and have to carry another bunch of bankrupt countries by joining the Euro. Britain clearly needs a few extra burdens right now. Well done, George. You are so right – not.
Eurozone bonds could be used to assist the new EU member countries that do not yet belong to the eurozone.
They could also serve to increase the lending capacity of the EU beyond the current mandates of the European Investment Bank and European Bank for Reconstruction and Development.
The EU could then finance investment programmes that combine a counter-cyclical function with important European objectives such as an electricity grid, a network of gas and oil pipelines, alternative energy investments and employment-creating public works in Ukraine. All these investments would help break Russia’s stranglehold over Europe. The objection that they would take too long to serve a counter-cyclical purpose can be rejected on the grounds that the recession is also liable to last a long time.
Two thorny issues would need to be resolved – one is the allocation of the debt burden among member states and the other is the relative voting power of the different eurozone finance ministers.
The existing precedents, namely the EU’s budget and the composition of the ECB, would be considered unfair and unacceptable by Germany. But many member states will balk at agreeing to a solution that changes the balance of power within the EU.
Nevertheless some concessions would have to be made to bring Germany on board. Usually it takes a crisis to bring about a compromise but the crisis is now brewing and the sooner it is resolved the better.
The crisis puts Germany right at the centre of events now. This is the crunch moment. Will Germany agree to act as the economic anchor for the EU? It seems possible, but only on the basis that Germany in future holds far more power over the various governments of the EU, and their financial policies.
The reality is that Germany will have to be made an overridingly strong member of the EU if it is going to be asked to hold the EU and the Euro together through this finncial crisis. If Germany wishes to carry out the role, and that is still doubtful, will the other countries be willing to accept a new role for Germany as effectively financial supervisor over all others?
No wonder German politicians are at odds with each other.
The other question is of course, is whether there is enough time to carry out the kind of re-balancing of the EU that is necessary to face down this crisis?
If Germany does achieve a position of enhanced economic power within the EU out of this crisis, what happens next?
A Euro substantially controlled by Germany would dictate a strong Euro policy over all other EU members, and the economic disciplines that Germany is well known for. Will Spain, Portugal, Italy and Greece really turn over a new leaf and begin to bow down to the wishes of bankers?
If they do, the combined growth rates of EU countries will inevitably be lower, as consumption in the German economic approach to life, is always kept in check, as are most forms of borrowing. The inflation that Germany fears would be held down, but so too would opportunities for economic growth. Europe’s economies would be condemned to a dangerous period of slow growth, higher unemployment and the process would become politically destabilising. It would be better to bring Europe’s economies back into balance by loosening ties than by strengthening them with a strong German hand on the tiller.
Soros’ plans would no doubt help to see off the current phase of economic troubles across Europe, and restore financial confidence. But the political consequences would be too severe, and a worse form of instability would result as Europe gets sucked into a new phase of excessive centralisation.
Was it really so bad when the Italians had the Lira and the French had the Franc? At least everyone knew exactly where they stood. Now Europe is in chaos, as are the politicians trying to see the way to go next.
Bloomberg’s take is that the EU’s bigger Euro countries will be forced to bail-out not only the weaker banks but also the weaker nations in the eurozone as well as those that have heavily borrowed in euros. See HERE.
All the bail-outs going on in the world, however, are being made imagening that once money refills the coffers, people will borrow and lend, buy and sell as before. What is not remembered is that recessions and depressions are based mostly on emotion, and not on money alone. It takes time to rebuild confidence, and persuade people to take risks again. Throwing money at lost confidence does not fix it. Banks with money are not lending it. People are not taking on extra borrowing. Politicians forget that being seen to be doing something, essential as that is for their political survival, in fact does little to accelerate the end of the crisis. Time alone will do that.
The survival of the Euro will ultimately depend on people’s belief that they are better off with it than without it.
Germany for one must surely be wondering whether being in the Euro is really in her long term interests, although you won’t find a politician ready to admit such a thing quite yet.
For a more detailed ananlysis see Der Spiegel’s Support For Wobbly Euro Economies.