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Blaming the Germans

In all financial transactions there are credits and debits. For the last few years there have been a lot of debits in Greece and the other, so-called, PIIG states. The converse has been that there have been a large number of credits in Germany.

Germany is not a paragon of fiscal rectitude- indeed it was Germany that first softened- by breaking altogether- the financial criteria by which the members of the Euro-zone are judged, but which they now insist must be applied strictly to other countries. Germany has amassed its credits by benefiting from a fixed exchange rate with the weaker economies of the south of Europe. The German economy has been out competing the rest of the Eurozone, which has been unable to balance their economies by either allowing their own currencies to depreciate, thus making their goods cheaper, or by allowing a German currency to appreciate, thus making German goods more expensive. This German free ride has caused considerable economic damage to those countries that are unwilling or unable to match the German policy of greater efficiency.

Now there is a bill to be paid: German industries benefited and provided capital to the German banking system, which in turn recycled capital into more loans to precisely those countries that were the debit to the German credit. Alas the capital can not now be repaid. The result is that the German banking system is now critically exposed to the southern tier of EU states.

Either the German banking system takes a major hit, and has to be recapitalized by the German state, or the debit states need to be rescued... by the German state.

The problem is that Germany refuses to do the one thing that would alleviate the crisis: backstop the rescue fund, the EFSF, with the full faith and credit of the ECB. This touches a serious nerve in Berlin, because such a policy carries with it a significant risk of inflation.

The problem, as always, is not that Germany wants to take over the EU, but that they definitely do not want to take over the EU.

Yet it is precisely the leadership vacuum that the Eurozone and the EU itself now faces that is creating an existential crisis. If Mrs. Merkel can not take decisive action, it will be taken by the markets. Then there will be debits amongst all the EU governments, and credits on a lot of trading desks, 

Comments

Sarunas Skyrius said…
--"The German economy has been out competing the rest of the Eurozone, which has been unable to balance their economies by either allowing their own currencies to depreciate, thus making their goods cheaper, or by allowing a German currency to appreciate, thus making German goods more expensive. This German free ride has caused considerable economic damage to those countries that are unwilling or unable to match the German policy of greater efficiency."

Only in the past couple of years has Germany been more efficient, as for some decades they were stuck with stagnant wages and, yes, an "internal devaluation" of sorts. And now, after a decade of relative suffering, when they were prepared to enjoy their newly-found comparative efficiency, they're suddenly the bad guys not willing to cough up the dough.
Jüri Saar said…
What about the whole reunification business - i've been left with the impression that it required financing and the financing wasn't exactly fortcoming from anyone else? An exception worth making?

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