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March 30th, 2013 
Peter Nolan
So are the accusations levelled against Germany unjust? Clearly, to consider
taxing smaller Cypriot depositors — pensioners, unemployed, students — was
an enormous mistake. Even though it was the Cypriot government itself, not
the Germans, who insisted on spreading the burden beyond the larger
depositors, it was obvious that it was too politically explosive to stand
and that Germany would get the blame. Mrs Merkel’s government should have
seen that one coming.
However, leaving aside that blunder, it is easy to see why German taxpayers
have had enough. Throughout this crisis, risk has constantly been
transferred away from private creditors on to the balance sheet of
taxpayer-backed institutions. After two bailouts, Greece’s public debt is
now around 70 per cent owned by eurozone taxpayers, with investors and banks
largely let off the hook.
This is particularly hard to swallow in Germany as it comes down to broken
promises. In the 1990s when the single currency was forged, German taxpayers
were given two cast-iron guarantees: you will never have to bail out another
eurozone country, and the European Central Bank will never enter the realm
of politics by propping up insolvent governments.
To reassure the Germans, a “no bailout” clause was cemented in the EU
treaties, explicitly stating that one eurozone country “shall not be liable
for” the debt of another. Time and again, the Germans were also promised
that the European Central bank would be the heir to the universally trusted
Bundesbank.
“There is no bank in the world as independent from politics as the European
Central Bank”, said Wim Duisenberg, the first president of the ECB, at the
time.
Some 15 years and several bailouts later, German exposure through various
loans and liabilities to weaker eurozone countries — including via the ECB’s
government bond-buying programme – tops a nerve-rattling €1 trillion.
With Cyprus, the German government finally drew a line in the sand. Wary of
dragging the electorate kicking and screaming into yet another hugely
unpopular bailout, Berlin was determined to let Cypriot banks, not German
taxpayers, pay most of the bill.
Germans are often accused of being obsessed with seeking to export their
rules-based system for trade, taxation and spending — “Ordnungspolitik” — to
the rest of the EU. This, critics say, lead to an unhealthy emphasis on
austerity, locking the Mediterranean into high unemployment and permanent
recession.
However, though the debate about when and how deep to cut is legitimate, the
basic premise behind a rules-based order is one with which many Brits would
sympathise. There are three main factors driving Germany’s attempt to instil
this, and none of them is about seeking domination.
First, whether involving government or banks, the actual risk-takers must be
made liable. If the bill for the mistakes made by banks or governments is
constantly passed on to German taxpayers, what incentives are there for
reform and to avoid even greater costs to German taxpayers down the road?
Cyprus sits on one the most bloated financial sectors in the world, seven
times larger than the country’s entire economy. Foreign wealth was lured to
Cyprus through generous interest rates and lax rules. It was a high-risk
environment.
The head of the Eurogroup and Dutch finance minister Jeroen Dijsselbloem faced
a barrage of criticism when he said last week that so-called “bail-ins” —
forcing shareholders and large depositors rather than taxpayers to take the
hit when banks fail – should become the norm in the eurozone.
The comments sent shockwaves through financial markets, as investors feared
Spanish or Italian banks might be next in line, but were largely endorsed in
Germany. Uncertainty around Cyprus was already plentiful so the timing was
terrible, but the sentiment of the comments was absolutely right: “where
[banks] take on the risks, [banks] must deal with them”, as Dijsselbloem put
it.
The second driver is Germany’s own experience. It was the combination of rules
and reforms that allowed Germany itself to rise from the ashes following the
Second World War, and later to bounce back from the hugely complex
reunification of East and West Germany. If it worked for Germany, why not
for the rest of the eurozone?
Within the context of a monetary union, British commentators are right that
there’s an element of inconsistency in this reasoning: the eurozone cannot
consist of 17 Germanies (where would German exports go, for example?).
However, Anglo-Saxon scepticism over the single currency obscures a wider
point: the German model of sound money and living within one’s means has a
lot going for it. Some of the best-functioning economies in Europe — such as
the Nordic countries — draw heavily from German economic thinking.
Swedish finance minister Anders Borg is arguably more suspicious of the
eurozone’s habit of passing debt around — including from banks to
governments – than are even the Germans. Sweden remains a rare success story
of how to deal with bust banks.
But there is also a third, and more fundamental, reason why the Germans fear
the prospect of perpetually underwriting the rest of the eurozone: they
can’t afford it. Though we like to think of Germany as an economic
power-house, according to a new Bundesbank study the assets of average
households in Spain and France are significantly higher: €285,000 and
€229,000 compared with €195,000 in Germany. In addition, as German
politicians are keen to point out, if “implicit debt” – such as the
liabilities of social security systems – are taken into account, the real
level of Germany’s debt would be 192 per cent of GDP — much higher than
Italy’s 146 per cent of GDP.
Germany faces a demographic time bomb. By 2050, the country’s current
population of 82 million will have declined to around 70 million – less than
the population in 1963. Far fewer will have to work for many more to finance
the country’s pay-as-you-go social security system.
This deep-rooted sense of lingering economic vulnerability, alongside a
genuine belief that Europe must learn how to live within its means, is
driving Germany eurozone policy, not the desire to dominate Europe that some
claim.
Regardless, it is clear that two vital pillars of Germany’s post-war policy —
commitment both to Europe and to sound money – are now clashing head on.
This is fuelling frustration. As the German tabloid Bild put it, as thanks
for coming to the rescue of others Germans are met with “criticism and even
open hatred”.
Perhaps it’s not surprising, therefore, that this month saw the launch of
Germany’s first anti-euro party, Alternative für Deutschland. According to a
recent opinion poll, about 26 per cent of Germans say they “could imagine”
voting for such a party — with a disproportionally high share amongst
first-time voters.
Mats Persson is the director of Open Europe, an independent think tank that
campaigns for EU reform.
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