German effort to save euro zone comes at a cost
By Howard Schneider,
In the course of Europe’s economic crisis, Germany has pushed its neighbors into a new fiscal treaty, demanded that other governments take tough austerity measures, forced losses on private investors who hold Greek bonds and helped shove uncooperative politicians out of office.
For demanding that other nations accept that painful medicine, Berlin has paid a price of its own: potentially $600 billion in loans, guarantees and other payments to help keep the euro zone intact.
Germany is Europe’s economic engine and the political power at the heart of the 17-member euro region. Without its checkbook, the experiment in a common currency would be doomed, but Germany has too much riding on it to see it fail.
The single currency has provided Germany with a ready export market free of shifting exchange rates and other risks. Much of what Germany has offered is in the form of loan guarantees that may never cost the country a nickel and that so far have had little effect on its government budget or credit rating.
But if the guarantees ever come due, they could turn Germany into one of Europe’s biggest debtors — and compromise the region’s economic health. The cost could approach perhaps 20 percent of Germany’s annual economic output.
German central bank head Jens Weidmann spoke of the risks on Wednesday, saying that efforts to stop the crisis with a “wall of money” were akin to the biblical Tower of Babel.
It “will never reach heaven. If we continue to make it higher and higher, we will, in fact, run into more worldly constraints — both financial and political ones,” he said in a speech in London.
The final tally of Germany’s commitments should become clear in the next few days when euro-area finance ministers meet to increase the size of the region’s bailout fund. Most euro-zone nations contribute to the fund. But the biggest burden rests squarely on Germany, whose annual economic output of roughly $3 trillion represents about a quarter of the euro region’s total.
At the meeting, regional leaders are likely to complete the establishment of the crisis-fighting system that they began in the spring of 2010. They are likely to increase the size of the fund by a minimum of around $250 billion, to more than $1 trillion.
Throughout the crisis, Germany has been resistant to bailouts and subsidies. Its opposition repeatedly pushed the region to the brink of disaster — including what Greek officials say was a near default in May 2010 before Germany agreed to an initial bailout.
“It has not been cheap to get the consent of Germany,” said Carlo Bastasin, a visiting fellow at the Brookings Institution. He said the price included the ouster of Greek and Italian leaders who had not taken strong enough action to tackle their nations’ debts and harsh austerity measures, such as deep cuts in public spending, in several countries. “The brinksmanship was a precise strategy — and it worked pretty well in terms of results,” he said.
In the debate over the size of the bailout fund, Germany argued for months that no increase was needed — and that it might even be counterproductive if it eased the pressure on governments to improve their finances.
But German Chancellor Angela Merkel signaled that she was ready to boost Germany’s aid to the euro region once she saw progress on a new fiscal compact to tighten public spending throughout Europe along with promises of stricter austerity in Greece and a deep reduction in the value of Greek government bonds.
Germany had also grown isolated in its resistance to an enhanced bailout fund. The U.S. government and other major economies, including much of Europe, have been saying the fund should be bigger so that investors feel confident that enough money is available to help any countries that run into trouble.
The willingness to increase the bailout fund is a “wholly anticipated retreat” by Merkel, consistent with the way she has behaved throughout the crisis, said Jacob Funk Kirkegaard, a fellow at the Peterson Institute for International Economics.
As of March 2010, for example, Merkel said there was “absolutely no question” of a bailout for Greece. She said Greece had to fix its own problems. But within two months, she had pledged $27 billion in loans to the country and agreed that Germany would guarantee 27 percent of a regional bailout fund.
Those and other direct pledges could put Germany on the hook for more than $600 billion, depending on the outcome of the finance ministers’ meeting. Some economists say Germany could also be at risk of losing another $700 billion that at the moment is essentially owed to the German central bank by other European central banks.
Germany is also the chief backer of the European Central Bank, which has expanded its own balance sheet with well over a trillion dollars in long-term loans to European banks that would be at risk if the euro zone cracks up.
The question now is whether the system erected with so much German input and design will prevent the worst.
That, in a sense, opens a new chapter of the crisis — testing whether the euro zone economy moves toward a German model of competitiveness or becomes one where perpetual transfers of money between countries are the norm.
The loans and guarantees offered by Germany may “be buying time for the public in Europe to come to terms with the fact that this is a fiscal union,” said Anna Gelpern, an American University law professor and sovereign debt expert. “It is just a matter of how we get from here to there.”