Germany’s “Beggar Thy Neighbour” Policies Need to Be Seen for What They Are

Time for Ireland, like Germany, to Look after Its Own Interests

Ireland’s banking and fiscal woes are mainly “home grown”. However we ignore at our peril the structural weaknesses in the Euro, and German chancellor Angela Merkel’s role in “adding fuel to the fire” once the trouble started. While we have been preoccupied with the disaster unfolding at home, international academics, economists and financiers, have for some time been raising questions about Germany, with good reason.

First there are significant parallels between German behaviour and statements leading up to the Greek financial crisis, and Germany’s stance leading up to our own financial crisis. In both cases German statements and inaction “spooked” the markets, and forced the two governments to take more “medicine ” than they needed or wanted. Many have missed the fact that this medicine (the bail-out financing) saved or will save German bankers with significant funds in higher yielding Greek/Irish bonds, from having to write off or provide for their poor investment decisions – an approach not open to either countries with respect to their own banks.

Erik Jones, professor of European studies at the Bologna centre of Johns Hopkins University, highlighted Germany’s role in significantly worsening the financial/market problems facing Greece, in the June-July 2010 issue of Survival, the journal of The International Institute for Strategic Studies. Change one word, Greece, to Ireland and he is writing about what unfolding around us in Ireland in November. He reminds us that in November 2003, it was Germany, together with France, who worked jointly and deliberately to set aside the excessive-deficit procedures set out in the Stability and Growth Pact because of their own problems. This subsequently opened the floodgates for the deficits of a number of countries in the Euro, particularly Greece and eventually ourselves.

However it was Germany’s approach to Greece’s debt crisis that has uncanny parallels to our own debt crisis.

It is not the level of debt that is important (if it was Japan would be in dire straits) but the debt flows (the creation of new debt, the servicing of existing debt, and the conversion of old debt into new debt) that count. Jones shows that what precipitated the Greek crisis was the flow of old debt into new bonds. A staunch commitment from European governments to support Greece would have eliminated concern about Greece’s ability to refinance its debt. Germany resisted this, mainly for internal political reasons. The fall-out was inevitable. As Jones explains it: “By insisting that Germany would support Greece only once it was unable to access the market, however, Merkel fuelled concerns that Greece would not meet its refinancing targets. Many began to speculate that Greece might even default. This explains why there was a sell-off of existing Greek bonds in secondary markets. Merkel inadvertently called into question Greece’s ability to manage its all-important flows.”

In a similar fashion (perhaps her East German origins makes her clumsy in dealing with markets) Merkel sought and won agreement in October 2010 that future Euro-zone rescue schemes would force bondholders to accept some pain, without however providing the EU and the markets a worked out proposal or a detailed explanation of how this would work (particularly with respect to future debt only) in practice. This naturally spooked the markets and adversely affected our debt flows, despite having six to eight months of cash reserves. We were thus forced into taking the EU/IMF bailout, meaning of course that German banks, which are significant investors in Irish sovereign debt or in the debt of our banks, are now likely to be fully repaid.

The continuing export surpluses of Germany “require” massive deficits with all the related problems in other countries (such as Greece), and generate huge savings in Germany which need to be invested. To get the best possible return much of these savings have been invested in higher yielding Greek sovereign and bank debt, and Irish sovereign and bank debt. Higher return normally means higher risk. However with EU/IMF bailouts, German banks continue to be in the privileged position of earning top high-risk yields while being fully protected by the bailout mechanisms from what were in many cases suspect or at least aggressive investment decisions. In other words, German domestic politics come before all else.

Jones calls all this “Merkel’s Folly” – “By refusing to back Greece, however, Merkel created uncertainty and scared off investors.” This behaviour on her part was sharply criticised in a widely quoted article in Der Spiegel by the Green Party Faction leader, Jurgen Tritten. He in essence called for “less populism, more statesmanship”, making the point that the interests of Germany and Europe are inseparable.

Paul Krugman and Robin Wells, in an article exploring how to get out of the current economic slump, pull no punches. “.. the rest of Europe needs to start holding Germany to account: the Germans may regard themselves as models, but their surpluses after 2000 [to pay for unification and a rapidly ageing and declining population], by flooding the rest of Europe with cheap money, played a large part in creating the real estate bubble in Europe’s peripheral economies. And Germany’s continuing reliance on export-led growth is in effect a beggar-thy-neighbour strategy of growing at its neighbours expense.”[The Way out Of the Slump, The New York Review, September 16, 2010.]

George Soros notes that European banks hold nearly a trillion euros of Spanish debt, of which German and French banks hold half. Simply put if the contagion reaches Spain, and it is rapidly going in that direction, it, the Euro, and a number of German and French banks are in a very big trouble. This is why creating a “fire-break” (which is what this really is) in Ireland, and probably next in Portugal, was/ is worth all the trouble from the EU and German perspective.

Soros notes the potentially fatal flaws in the structure of the Euro, and concludes, more in sorrow than in anger: “Germany now wants to treat the Maastricht Treaty as the Scripture that has to be obeyed without any modifications. This is not understandable, because it is in conflict with the incremental method by which the European Union was built. Something has gone fundamentally wrong in Germany’s attitude towards the European Union.”[The Euro & the Crisis, George Soros, The New York Review, 19 August 2010.]

We all know what happens to a fire-break. It is consumed so that others can be safe. Of course we have questions to answer, but we have some to put also. We need to know if Germany will do its bit to save the euro, and mend its approach to its export surpluses, internal costs and spending, and its savings. And we need to know if German banks are providing for bad and doubtful debts on their sovereign and other loans as we, the Greeks, and others are now doing.

Finally we need to seriously consider the possibility of a failure of the euro, the implications for Ireland, and crucially what that means for how we handle our agreement with the EU/IMF.

Richard Whelan is a commentator on geopolitics. His website is www.richardwhelan.com.

The 10 key weaknesses in the Euro are set out in the article titled “10 Reasons Why the Euro is Likely to Fail”

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