Is Germany preparing to bail out of the Euro?
The European Union held a summit meeting last week, prompting a significant rally in both European and American markets at the perception of progress in controlling the Euro meltdown. However, it’s difficult for a sober analyst to find anything of long-term significance coming out of the summit. Spain got a vague commitment to pump bailout money directly into its banks, instead of handing the Spanish government a pile of rescue money with “austerity” strings attached, but no one is terribly clear about where this bank bailout money will be coming from.
Post-summit euphoria has already begun to fade, and it fades nowhere more swiftly than in the nation that glumly supposes it knows damn well where the bailout money will be coming from: Germany. It is increasingly clear that the entire Eurozone is powered by a long extension cord, patched here and there with austerity duct tape, running all the way to Berlin.
The Germans know a bad investment when they see one, and Spain is a horrible investment, on a scale many times the size of the legendary Greek bailout void. Reuters notes that it might not be possible to recapitalize the Spanish national banks fast enough, even if the money can be found. Spanish debt remains well north of 80 percent of GDP, and its bonds hover near the 7-percent-yield meltdown point. It’s a classic example of unsustainable debt built up by decades of madcap government borrowing, and it’s chilling to watch a nation as large as Spain reach the terrible moment when it literally cannot borrow enough money to sustain itself. Anyone who thinks government deficits are arbitrary spreadsheet numbers which can be pumped up without limit should watch this horror show carefully.
Now that it cannot float its massive debts any longer, Spain is reportedly considering deficit-fighting measures that include “a rise in value-added tax, a new energy levy, and ending property tax breaks.” In other words, jacking up taxes and murdering their economy. Big Government is not embarrassed by its deficit fat rolls and wobbling chins of debt; it uses the weight of its bankruptcy as leverage to demand more money and power from the public.
Germany’s influential Der Spiegel contemplated the aftermath of the EU summit, and produced a remarkable editorial on Tuesday entitled “The Euro Endangers German Economy.”
“The common currency union was supposed to benefit the economy of the entire European Union,” writes the Spiegel staff. “Now that the euro is struggling, however, it is bringing growth down with it. Germany’s economy, once seemingly immune to the crisis, is now facing mounting difficulties.”
This latest round of German anxiety was kicked off by the decision of the immense Commerzbank to bail out of investments in the shipping industry, previously regarded as “part of the bank’s core business,” because executives are worried about the European debt crisis… including a good $18 billion of Spanish exposure.
“Commerzbank isn’t alone with such problems,” Der Spiegel observes. “The euro crisis and the higher capital requirements being imposed by regulators have adversely affected almost all European banks. And because of growing fears within the banks of a collapse of the euro zone, they are preparing for the worst by withdrawing to their home markets and winding down many investments.”
This, of course, is bad for the German economy. There are predictions that “the German economy will stagnate by this fall because of the euro crisis” as the Eurozone heads for a nearly inevitable recession. Weak banks are bringing down companies that depend upon their financing. Contagion is leaking across the borders into formerly powerful German banks. Even the mighty German auto industry, which has thus far weathered the European crisis in fairly good shape thanks to solid overseas demand, is growing fidgety. All of this will lead to mounting political pressure on the German government, in whose hallways a great deal of aspirin is already being consumed.
The choice before Germany may boil down to unplugging itself from the deepening Euro crisis, or sacrificing more of its sovereign control to a Eurozone that seems intent on bleeding it dry. The global welfare recipients who received the last dozen bailouts expect another, and they’re not terribly interested in the grumblings of unhappy German bankers and shipping company executives. German resistance to this process will only get them painted as villains. Many such paintings can already be found in Greece. They will proliferate in Spain and other European dependencies as well, if Germany says “no” instead of “farewell.”