Germany’s own goal: Why Berlin’s sense of invulnerability will be its undoing
24/06/2012 Deja un comentario
(…..) Current strategy for dealing with eurozone crisis is largely a German one. But far from limiting risks to Germany, it is maximising them. German economy is not immune to the economic slump enveloping a growing swath of Europe. One country after another will need bailing out, with Germany ultimately providing the back-stop. Much of this debt will not be repaid, leading to a dramatic rise in Germany’s public indebtedness. Without a mutualisation of risk, the euro will collapse, with devastating implications for German exports (to EU and non-EU markets alike as a euro collapse would hit the global economy hard), value of Germany’s foreign investments, and the stability of its banking sector. These are just some of the direct economic costs; the political fall-out would be grave for Germany. Isolated and blamed for the collapse, it would be poorly placed to pursue its interests through whatever is left of EU. By contrast, reforms needed to stabilise the eurozone pose far fewer risks to Germany. Debt mutualisation need not be open-ended, so moral hazard could be limited. And it is far from clear mutualising debt would boost Germany’s borrowing costs compared to the current approach, which threatens to undermine the country’s creditworthiness without doing anything to address the underlying reasons for the eurozone crisis. The arguments for a banking union are equally compelling. If the eurozone banking crisis is left to fester, banks will collapse, which in turn will hit German banks (and hence German taxpayers) very hard. In return for agreeing to mutualise debt and to introduce a eurozone back-stop to the economy’s banking sector, Germany could demand a host of concessions. The political union needed to give legitimacy to these institutional reforms would be cast in Germany’s image. Berlin would cement its influence over Europe’s economy and its politics but in a benign, hence sustainable fashion. 5 years ago Germany was plagued by self-doubt and even self-flagellation. Now the political debate, media coverage and national mood generally are marked by hubris, self-righteousness. Germany’s strength is exaggerated and its weaknesses downplayed. The German authorities are underestimating how much they have to lose from the eurozone crisis and the damage it is inflicting on the European economy as a whole. Germany should agree to big institutional reforms of the currency union, not out of charity, but as a way of containing the risks to itself. A deepening crisis, culminating in defaults, a rupturing of eurozone and most probably the single market are all but inevitable under current strategy. This will not only do huge economic damage to Germany but leave country isolated and mistrusted by a region from which it derives its strength. With German economy slowing rapidly and investors starting to question safety of German debt, it is possible the country will change course. But at present it appears that Germany is not for turning.