Let’s start with facts. Germany’s economy is the colossus of the euro zone (the 17 countries using the euro), representing 27 percent of the total. German unemployment, 5.4 percent in April, is half the euro zone’s 11 percent average. Global investors so trust Germany that they’ve beaten down interest rates on its 10-year government bonds to a puny 1.3 percent.
What might Germany do? For starters, it could stimulate its own economy, hoping that spillovers would help Europe’s other economies. Next, it might embrace “eurobonds” backed by all 17 euro countries that, in effect, would be guaranteed by Germany. Weaker countries would benefit from Germany’s strong credit rating; they could borrow at lower interest rates.
Finally, Germany could prod the European Central Bank (ECB) — Europe’s equivalent of the Federal Reserve — to be more aggressive in supporting shaky banking systems and in promoting faster economic growth, even if that created somewhat higher German inflation.
Unfortunately, the effects would be modest. A “rise in domestic demand is unlikely to translate into much growth support for other countries,” concludes a report from the Organization for Economic Cooperation and Development. The reason: Exports to Germany represent only 3 percent of the economies (gross domestic product) of France and Italy, 2 percent for Spain and 1 percent for Greece.
As for eurobonds, they would have to be issued in huge amounts to have a noticeable impact. In 2011, the euro zone’s GDP totaled 9.4 trillion euros ($11.75 trillion). Floating 10 billion or 15 billion in eurobonds would be a nonevent. But large volumes of eurobonds might hurt Germany’s credit rating. “Interest rates would go down for everyone else and up for Germans,” says Stephen Silvia of American University, an expert on Germany.
Indeed, Germany’s costs of saving the euro could be immense. A report by Carmel Asset Management, an investment company, puts the bill at more than 500 billion euros, an amount that would raise Germany’s debt/GDP ratio from 2011’s 81 percent to 103 percent. The report is titled: “Achtung Baby: Germany Is Riskier than You Think.”
It’s true that the ECB, providing deposit guarantees for banking systems, might foster stability — that is, prevent things from getting worse. But with the ECB’s main interest rate at 1 percent, further cuts might not much increase economic growth. If different inflation rates emerged between Germany (where labor markets are tight) and debtor countries (where they aren’t), debtor countries could become more cost-competitive. But this would take years.