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Germany's Financial Turnabout
Leaders Undergo a Change of Heart, Pledging to Assist Ailing Neighbors

By Craig Whitlock
Washington Post Foreign Service
Thursday, February 26, 2009

BERLIN, Feb. 25 -- Germany is the world's leading exporter and fourth-biggest economy, but during the global financial meltdown, it has also been among the most tightfisted. For months, German leaders have warned that spending and lending huge sums to fend off recession -- such as the United States' $787 billion stimulus package -- will backfire in the long run.

In recent days, however, German officials have had a swift change of heart. With customers around the world no longer in a buying mood, BMWs and other high-end German exports are rapidly piling up on the docks. Analysts predict that Germany's economy could shrink this year by 5 percent, the worst contraction among Europe's economic powers, prompting authorities here to consider large infusions of money to prop up struggling European countries.

Last week, Finance Minister Peer Steinbrueck, who in September derided the financial crisis as "an American problem," said for the first time that Germany would intervene, if necessary, to prevent a fiscal default by other countries that use the euro. "Collectively, we will have to be helpful," he said.

Three days later, Chancellor Angela Merkel, who had repeatedly stated that Germany would not bail out struggling neighbors, said Berlin was now prepared to do just that by organizing rescue packages for Eastern Europe through the International Monetary Fund. "If help is needed, we are ready," she said.

Few countries are as politically and culturally averse to debt as Germany. Ever since the days of the Weimar Republic eight decades ago, when hyperinflation ruined the economy and led to the rise of the Nazi Party, Germans have been dedicated savers who eschew credit cards and mortgages in favor of old-fashioned cash.

In recent years, as other European countries spent freely and saw their property and financial markets boom, German lawmakers raised taxes and cut popular welfare programs so they could balance the federal budget. Today, Germany's public finances are the healthiest in Europe -- but now the country is being called upon to pay for the sins of its undisciplined neighbors.

Otto Fricke, Budget Committee chairman in the lower house of Parliament, said the idea of foreign bailouts is unpopular among many Germans. The political timing is also terrible, with national elections set for September.

"People say, 'Why do we have to give other countries money when we ourselves have trouble?' " he said.

But Fricke said Germany had a moral and practical duty to assist neighbors that, until recently, have gobbled up German exports. Lawmakers, he said, are also coming to the sobering realization that some core European markets -- Italy, Ireland and Greece, for example -- are grappling with severe fiscal problems that could lead to a regional meltdown if Germany did not help out.

"Right now, nobody knows how much money you have to put into what country," he said. "That really makes us a little bit afraid."

On Sunday, Berlin hosted a summit of eight European countries to discuss ways to rescue ailing members of the European Union. Leaders of the eight countries called for a doubling of the IMF's balance sheet, to $500 billion, in case the fund receives more emergency requests for aid.

Though the E.U. leaders did not specify who would pony up the money or where it might go, officials are worried that several European countries might need a bailout if the global economy continues to deteriorate.

The IMF has rescued two members of the bloc -- Hungary and Latvia -- and another, Romania, has said it may be next. Two other key trading partners in the region, Iceland and Ukraine, have also received IMF aid.

German officials have said that if they dole out any assistance to their neighbors, it will be through the IMF.

"Germany is not able to do it directly because it could become so expensive that the burden will be too great for it to carry alone," said Thomas Straubhaar, director of the Hamburg Institute for International Economics.

He said German lawmakers wanted to ensure that Belgium, the Netherlands, Finland and other stable euro economies foot the bill, too. "But Germany has the biggest interest in supporting its weaker neighbors, because Germany has the most to lose" if its export markets dry up, he added.

Germany also wants to work through the IMF for legal reasons. Under terms of the 1992 treaty that led to the creation of the euro, individual countries that use the currency are prohibited from bailing out others if they default on their public finances. The intent was to force countries to embrace fiscal discipline.

German officials said they would prefer that the IMF take any political heat for imposing strict fiscal reforms on countries that accept bailouts. Latvia and Hungary, for instance, have grappled with angry street demonstrations.

Steffen Kampeter, a member of the German Parliament and economic policy adviser to Merkel, said it was vital to ensure that any rescue packages for Eastern Europe, in particular, come with strings attached.

"We don't want to just bail out countries, because that would create a moral hazard," he said. "They consumed too much and behaved similarly to the United States, with too much debt. This is something they have to solve primarily on their own."

Germany's reluctance to open its wallet has irritated officials in other European countries.

In December, British Prime Minister Gordon Brown and French President Nicolas Sarkozy did not bother to invite Merkel to an emergency meeting in London to discuss a unified European response to the global credit crunch after Germany said it could muster only about $40 billion on a domestic stimulus package -- a fraction of what France and Britain had urged.

German leaders were quick to hit back. Steinbrueck, the finance minister, ripped Britain for "years of lecturing us on how we need to share in the gains of uncontrolled financial markets" but allowing its banks to run wild. He also dismissed Brown's stimulus package. "All this will do is raise Britain's debt to a level that will take a whole generation to work off."

Merkel has taken a similar line. In a speech in December in Stuttgart, she said any thrifty German housewife would have better sense than some of Germany's allies. "She would give us some short and correct advice, which would be this: 'You cannot live beyond your means in the long run.' "

"We are not going to participate in this senseless race for billions," Merkel added. "We have to have the courage to swim against the tide."

As Germany's economic plight has worsened, however, Merkel and her government have softened their position. This month, legislators approved a second stimulus package, worth about $64 billion, aimed at boosting domestic consumption. Even then, Merkel was criticized by Kampeter, a fellow party member, as going on a "spending spree."

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