Handelsblatt worries about the cost of Europe to Germany

Under the headline "What does Europe cost" Handelsblatt worries about the huge cost Germany will have to shoulder to safe the euro and European integration. "The Americans say Germany has to supply money to Europe", the paper writes in its leading front page story. "The French request that Germany has to share the advantage it gets because of its low interest rate. Only Germany has the financial power to safe the euro, Brussels says." The paper goes on to add up the sums that Germany is already paying for the euro rescue: €280bn for the EFSF, €57bn as the share for the ECB's SMP, €79bn as Germany's net contribution to the European budget since the year 2000. But all of that was not enough, Handelsblatt writes. "Now the crisis managers develop new ideas on a daily basis: there is the banking union, an attempt to use the German savings for bankrupt banks in the South and there are Eurobonds in which the South would profit from the good German creditworthiness." In an editorial Gabor Steingart, the paper's editor in chief, notes: "It is not the European idea that has failed. It is the belief that one country can live on the expense of the other."

The first criticism, about the EFSF-ESM's size, is true but irrelevant. As I have argued from day one of the EFSF's creation, its problem is not its size but its CDO-like structure. Turning to the second criticism, that it resembles a Dickensian Workhouse, Spain's current predicament is instructive: To get money to give to its decrepit banks, the nation must be humiliated and undergo further fiscal waterboarding so that Italy and others are deterred from turning to the EFSF for help. In this sense, when Europe's functionaries say that there is no need for further action on Spain since the EFSF is available to help, they are inviting the Spanish to enter the Workhouse for a life of undeserved misery on behalf of their bankers. And they have the audacity to call this `solidarity' with the Spanish people.

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As I wrote in a Le Monde article recently, the bankrupt Greek state was recently forced, by the troika, to borrow  4.2 billion from the EFSF so as immediately to pass it on to the European Central Bank (ECB) so as to redeem Greek government bonds that the ECB had previously purchased in a failed attempt to shore up their price. This new loan boosted Greece's debt substantially but netted the ECB a profit of around 840 million (courtesy of the 20% discount at which the ECB had purchased these bonds). Is this `solidarity with the fallen', even of a Victorian Workhouse type?

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When the 2nd Greek `bailout' was agreed, you may recall that the Finnish government asked for guarantees, for collateral, that would reduce its exposure to Greece. The Greek government conceded, promising collateral of  925 million in value. One might have expected that the said collateral would come in the form of some assets (e.g. Greek government owned real estate). But no! Helsinki would have none of that. Instead, they demanded... cash! And cash they received. Last month, in May 2012, Athens wired  311 million to the Helsinki government, as a first installment. My sources here in the United States tell me that the Finnish government is now seeking to invest this money in joint ventures with US and other European firms. Now that is what I call solidarity with Greece...

...Europe works along the principle of pacta sunt servanda...

In order for a pact to work it must be workable. In order for that pact to be honored by its signatories, it must be honorable. This is manifestly not possible with with the treaties that have given form to the EMU and no amount of rhetoric from the core or compliance from the periphery will able to make those treaties work. This basic fact must be acknowledged and the appropriate changes must be made before this situation can be resolved.

Acknowledgement of the flaws and their consequences seems unlikely to happen in a timely and orderly manner. Germany has clearly benefited from the current arrangement and the price Germany will pay for this remains largely in the future and uncertain in nature. Perhaps the citizens of the periphery will submit to being, effectively, badly used and abused domestic servants of wealthy Germans, but that will still not make them able to pay unpayable debts. Nor will German control of their societies and economies make such payment possible. But such an outcome might make the costs to Germans of writing down these debts more palatable.  

 

"It is not necessary to have hope in order to persevere."

Last week I wrote a column entitled The riddle of German self-interest. To my surprise, it received a lengthy response from a senior and highly respected official of the German finance ministry. I am very grateful for this reply, because it clarifies the German finance ministry's position and raises a number of profound issues.

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I fear that austerity without end will bring about a return to the unstable populist politics the European Union was designed to prevent. That could shatter the eurozone and, with it, the EU, thereby ending the most successful attempt to build peace and prosperity in Europe since the fall of the Roman Empire.
Moreover, it is clear - and has long been so - that the responsibility for preventing that outcome rests on Germany, Europe's central power, in every sense. As Charles Kindleberger argued, in a panic, the creditworthy country has to lend freely if a fixed exchange rate system (or in this case a currency union) is to survive.

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Fiat justitia, et pereat mundus (let justice be done, even if the world perishes) is a dangerous motto.