In Friedrichshain, a hip neighbourhood in the former East Berlin, Hannah Horeis could be found enjoying a beer and a hand-rolled cigarette, chatting with her friend, Anna Enge, whose 3-month-old son, Conrad, was nestled into a baby Snugli and a deep sleep. The mise en scène screamed young intellectuals, especially Horeis, with her cool demeanour and serious gaze, that cigarette poised in mid-air.
Horeis is in her final year of economics. Enge is an economics graduate who works for an American consumer products company. And Germany, a decade after an initial 12 countries adopted a new-fangled currency called the euro, has emerged, in the words of billionaire investor George Soros, as a near Imperial power. In an interview with Spiegel Online last week, Soros said that Germany is at risk of being “hated and resisted” if it doesn’t swiftly bend to effective accommodations of the eurozone’s debtor countries, most urgently Spain and Italy.
In Brussels this past Thursday, German Chancellor Angela Merkel did, if not bend, at least tilt. The European Stability Mechanism, which is scheduled to come into effect this month, is the 500-billion-euro bailout fund designed, according to the original treaty language, “to be activated if indispensable to safeguard the stability of the euro as a whole.” It is those funds that will be tapped to stabilize banks in both Spain and Italy, but only under the supervision of a financial sector overseer that does not yet exist, a reminder that one of the many flaws in the structure of the monetary union was the absence of a centralized banking regulator.
The sense on the street is that Germany has not suffered any serious aftershocks from the financial instability in the eurozone — “It hasn’t really arrived here yet,” says Horeis. The young women see the unfolding drama academically as opposed to personally. For Horeis, “this huge eagerness to get this new currency” should have been a red flag for the mistakes that were subsequently made. She taps the inclusion of Greece as a case in point.
“Greece is a huge bureaucratic country with a lot of corruption where nothing gets paid,” she says.
So who can be surprised that without broad centralized controls the country would end up underwater?
Standing and swaying in the baby-lulling manner of young mothers everywhere, Enge adds that the shared currency resulted in an obvious constraint.
“There were problems with countries not being able to write down their currencies,” she says, meaning that without the ability to devaluate, the southern countries were stripped of their standard methods of re-stabilizing their own economies.
Two obvious questions: What do the two young people see as the chief benefit or benefits gained by Germany’s inclusion in the euro?
“It’s hard to say,” says Horeis. “Life is easier. Travelling around Europe.”
So there’s that.
A decade ago, 70 per cent of Germans said they didn’t want to give up the Deutschemark. Today, 70 per cent of Germans want it back. Given the opportunity, would these women vote in favour of the euro today?
Horeis: “Yes.”
“I wouldn’t, no,” adds Enge. “We had a strong currency before.”
The street view, engaging as it is, can’t capture the harder realities that define Germany’s role in the ongoing euro debt crisis. Chancellor Merkel’s appearance on the world stage tends to be defined in terms of rectitude and financial conservatism, a ceaseless stern lecture to the seemingly freewheeling countries of the south to adopt strict reforms.
Fair enough, as far as it goes.
But Germany’s full role is fabulously complex.
In May, the country’s largest bank, Deutsche Bank AG, reached a $200-million (U.S.) settlement with the U.S. government over the practices of a wholly owned U.S. mortgage provider, MortgageIT, which it acquired in 2007. According to the lawsuit filed in the spring of 2011, the subsidiary knowingly misled HUD, the Department of Housing and Urban Development, by falsely certifying the quality of subprime and so-called “Alt-A” mortgages for insurance purposes.
Commerzbank AG, Germany’s second-largest bank, started writing down its exposure to U.S. subprime assets in 2008, was later rescued by German taxpayers, and today continues to push through a restructuring that recently saw its announced exit out of commercial property lending.
Meanwhile, Dresdner Bank, the country’s third largest, was gobbled up by Commerzbank after massive losses of its own, while Germany’s own financial stabilization fund worked at siphoning bad assets from the fragile balance sheets of smaller lenders, not to mention the nationalization of the country’s largest real estate lender.
The profile of Germany’s banking sector has historically been one of broad conservatism, says Trevor Evans, professor of economics at the Berlin School of Economics and Law. Approximately one-third of the banking sector is comprised of profit-making institutions — Deutsche Bank et al. — with state-owned savings banks accounting for a further third. But even there trouble blossomed in the regional savings banks, known as Landesbanks, which went seeking high-yield assets.
“And what were they?” asks Evans. “Collateralized debt obligations. So the Landesbanks, these regional savings banks, set up subsidiaries in Dublin and started buying these securities, which they understood absolutely nothing about and made big losses. It’s tragic.”
That bit about Dublin refers to the parking of offshore assets against which banks were not obligated to hold capital.
In Europe, there was one country that proved the exception to such high-risk practices. It’s likely that the right answer wouldn’t readily leap to mind: Spain.
“It’s the only central bank in Europe that prohibited its bank from setting up special investment vehicles and parking collateralized debt obligations,” Evans says. “In Spain, banks were not allowed to do that.”
Here the stories diverge. Unlike Spain, Germany didn’t experience a housing bubble.
“Bank lending practices are very cautious,” Evans says.
And home ownership in Germany has historically been among the lowest of OECD countries at about 40 per cent, versus Spain, which has the highest at twice that number. (Home ownership in Berlin, where rents until recently were fantastically cheap, was about 14 per cent in 2011.)
Concurrently, Germany did adopt a program of reform measures, particularly in the labour market, Evans notes.
“There was a serious revision of the unemployment benefit system and that, together with various other measures, resulted in real wages not rising at all between 1999 and 2007,” he says.
Domestic demand was flat.
The southern European economies, with inflows of money from northern Europe, grew quickly, as did wages and, logically, consumer demand.
“As a result of this imbalance, Germany under the euro built up a bigger and bigger trade surplus,” says Evans, rising from a surplus of $50 billion (U.S.) a year in 2000 to a high of $200 billion in 2007, just before the crash. About half of that was a surplus with other eurozone countries.
“Germany benefitted very, very directly from the euro,” Evans says. “Without the euro, its currency would have appreciated and made it virtually impossible to have generated that sort of trade surplus.”
“You have a model,” he continues, “where there’s a lack of demand in Germany because wages aren’t rising, so the German banks lent money to Spain, Portugal, Greece so they could buy German exports. In that chain, which is an unsustainable chain, Greece was the weakest link, and the crisis broke there first. But it was the weakest link in a polarized relationship between northern Europe, particularly Germany, and southern Europe.”
Explaining to Germans that Germany has benefitted disproportionately than any other country is, says Evans, “an uphill task.”
In his interview with Spiegel Online, George Soros phrased it thusly: “No country has benefitted more from the euro than Germany, both politically and economically. Therefore, what has happened as a result of the introduction of the euro is largely Germany’s Schuld — its responsibility.”
As an understatement, last week’s meeting of euro leaders in Brussels didn’t convey the message that Germany accepts this responsibility. Not at all. Germany is merely willing to back a capital-injection plan that will bring short-term relief to Italy and Spain. A finger in the dike in a series of endless meetings, each of which, Evans notes wryly, is habitually described as “decisive.”
Sitting in his office on Badensche Strasse, the professor expresses clear exasperation at what he sees as a misunderstanding of government deficits.
“There was no problem of deficits up to 2007,” he says firmly. Greece was the only country in the eurozone that exceeded the 3 per cent of GDP limit imposed in the early euro framework. Spain had a surplus. “The important point is that the deficits were the result of the financial crisis, not the other way round.”
Bank bailouts, expansive macroeconomic programs, an economic slump, diminishing tax revenues: the narrative for Evans is straightforward, the outcome predetermined.
The fix: illusive.
Last year, the European Commission introduced the so-called “six pack” of measures aimed at restricting government debts and budget deficits. “The key problem is that it puts all the adjustment on the deficit countries,” Evans says. “So countries that have a trade deficit are required to eliminate their trade deficit. But there’s no pressure on Germany to eliminate its trade surplus, but they’re two sides of the same coin.”
By example, allowing wages to rise, thereby increasing demand within Germany and encouraging imports from southern Europe.
The subsequent fiscal compact, Germany’s insistence that each country introduce a constitutional provision that bans deficits altogether, is in Evans’ view simply crazy.
“It is an absurd rule to restrict governments in that way,” he says. “If a crisis like this hits again, which it will at some point, governments will have to find a way around it. Governments have to react with expansive fiscal policy if the economy is facing a slump.”
Could the euro fail? Evans believes it could. But then he grabs a full-page newspaper advertisement from a nearby bookshelf. The ad appeared in all the major German papers this time last year. “Der Euro ist notwending,” is the boldfaced headline. (The euro is necessary.) The ad is signed by such corporate heavyweights as Siemens and Thyssen. “Big German capital sees its future absolutely tied up with the euro,” Evans says.
In many parts of Berlin, there’s no sense of big German capital. Shoppers flock the Turkish market at Maybachufer, where young musicians with the look of tireless travellers have taken over the embankment of the Landwehrkanal. At the East Side Gallery in Friedrichshain, which is not a gallery in the conventional sense, but 1.3 kilometres of the Berlin Wall, young lovers kiss in front of original artworks that reimagine Checkpoint Charlie and East-West relations pre-1989. Berlin is cool. They say it’s the best place to be unemployed.
Germany doesn’t have any great worries in that regard. Not yet. Facing its role in the euro responsibly is perhaps the greatest test the country has met in the past half century.
Source: the star
Author: Wells, Jennifer
No comments:
Post a Comment