Unlike its struggling neighbors, Germany takes a slow and steady stance on the euro crisis
By Michael Birnbaum,
BERLIN — German leaders have a message for their anxious neighbors: Perhaps the euro crisis isn’t so dire after all.
A growing chorus of German policymakers is saying the region has years to resolve the euro zone’s problems, even as Spain’s borrowing costs hit painful heights at an auction this week and Italy’s costs have also been rising.
Without Germany on board, Italy and Spain are likely to keep languishing, with little change in the fundamental contours of the crisis and the constant risk that an economic shock could set off a chain reaction that would be difficult for Europe to control, many analysts say. Germany says the risks are manageable.
“I am confident that Europe can solve its problems,” German Chancellor Angela Merkel told reporters recently. “That doesn’t happen from one day to the next.”
Others are not so sure.
Access to affordable cash is crucial for governments to function, since borrowed money pays for many basic services and quickly reverberates into the private sector. If borrowing costs spike — Spain is at euro-era highs, and Italy is close — the fiscal benefits of tough austerity measures can quickly be wiped out by crushing debt payments. If borrowing costs are low, as are Germany’s and those of its northern European allies, governments can focus on other problems with their economies.
The German approach to fixing the crisis has remained slow-paced even as its neighbors grow more frantic about their economic future. Germany’s constitutional court could take months to review the legality of Europe’s new bailout fund, which guarantees troubled countries’ access to aid. A long list of German economists published a letter this month condemning Merkel for handing too many concessions to her European neighbors. German leaders say they have ample time to implement grand plans for economic integration.
Those German officials also say that Spain and Italy’s borrowing costs are not high by historic standards and that the countries can withstand a temporary rise in interest for quite some time. Some of the cries for help are negotiating tactics, they say, meant simply to scare Germans into acting.
“After writing Germany down as the sick man of Europe about 10 years ago, now Germany is expected to be the leader. We just want to be realistic,” said a senior German diplomat, speaking on the condition of anonymity to candidly discuss sensitive policy. “The bond rates of these countries were similar to what they were before the euro.”
But many analysts say that Germany’s focus on what could work in an ideal scenario ignores what might happen if things go wrong.
“Europe is extremely fragile, and any small trigger could be enough to set things worse,” said Sebastian Dullien, a senior fellow at the European Council on Foreign Relations.
German officials say that if the situation significantly deteriorates, Europe has further resources to commit to calming the crisis. And on Thursday, the German Parliament voted overwhelmingly to approve aid for Spain to bail out its banks, one sign that it is still willing to help its neighbors.
But other countries that have until now allied themselves with Germany are saying that they are newly worried about Europe’s response, going against the German view. Even stoic Finland, a AAA-rated bastion of fiscal prudence that has allied itself with budget hawk Germany throughout the crisis, signaled its discomfort last week.
“This situation is dangerous, very dangerous,” Finnish Prime Minister Jyrki Katainen told the daily Helsingin Sanomat, saying that the crisis was at its worst point since May 2010, shortly before Greece requested its first bailout.
A German member of the executive board of the European Central Bank, Joerg Asmussen, said on Wednesday, “There is a real north-south divide, which has not been seen in the last 10 to 15 years.”
“We have to overcome that quickly,” he told the German Stern newsmagazine.
An unprecedented situation
Germany’s sense that it has time to pursue the best solutions for the euro zone’s ailments has led it toward an ambitious plan for a more centralized Europe. Merkel wants to knock down borders between countries and hand over precious budget sovereignty and oversight to European Union policymakers in Brussels. In exchange, frugal German taxpayers would do more to support their struggling neighbors. That would help bring down the borrowing costs of peripheral countries such as Italy and Spain, especially if Germany consented to give its backing to overall euro-zone borrowing.
But building a stronger union would take years. The efforts to better unify Europe’s economy also scare other countries, especially France, that fiercely guard their sovereign rights and worry that giving up power to the E.U. is tantamount to handing over their keys to Germany.
Spain and Italy say they need quick help, pointing to borrowing costs that have spiked after briefly subsiding following an E.U. summit last month. Spanish Prime Minister Mariano Rajoy, a center-right politician who has nevertheless argued for more leniency for his country, last week announced $80 billion in austerity measures in a bid to slash Spain’s deficit.
The measures, which will increase consumption taxes, hitting consumers around the country, and which will further thin Spain’s strained social safety nets, could worsen the short-term pain of the country’s recession. Germany has said that if Spain simply cuts its deficit, investors will reward it with lower borrowing costs.
But Rajoy’s country is still facing unemployment of 24.4 percent, and that will probably worsen with the additional cuts.
“What the Germans fail to understand is the nature of this crisis,” said Fernando Fernandez, an economist at the IE Business School in Madrid. “We have a monetary union that has ceased to function as a monetary union, where markets have renationalized. That’s a situation without precedent.”
‘Not that worried’
Many economists view borrowing rates above 6 percent as unsustainable, and that level is what drove Greece, Ireland and Portugal to seek bailouts. But in Germany’s view, yields on Spanish bonds — just above 7 percent as of Friday — are indeed with precedent, since Spain borrowed at rates well above 8 percent for most of the 1990s, touching 14 percent at one point. Italy had even higher borrowing costs than Spain in the 1990s.
Germans also point to Spain and Italy’s borrowing schedule — Italy will have to refinance significantly less debt in the second half of 2012 than it did in the first six months of the year; after this month, Spain also has a break until October.
“People are not that worried,” said a senior German official speaking on the condition of anonymity because the official was not authorized to speak publicly.
But many economists say that the comparison is misleading: higher inflation and economic expansion during the 1990s made high borrowing costs more sustainable back then. Now, with countries in recession, higher interest rates hurt far more, the economists say.
Nor is there any clear rule about how much debt is sustainable.
In Spain and Italy, however, the higher borrowing costs are more worrisome, many analysts say.
“The amount of credit in those countries is really imploding,” said Simon Tilford, chief economist at the Center for European Reform in London. “If the government slashes spending at this juncture, all they’re going to do is aggravate the slump.”
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