Germany at Its Rubicon
By Wolf Richter www.testosteronepit.com
No country is economically more dependent on the survival of the euro than Germany: the export powerhouse—largest exporter in the world until China overtook it last year—thrived because Eurozone countries could borrow unlimited amounts of euros to buy German goods. But now that the gravy train has stopped in front of a mountain of unmanageable sovereign debt, Germany finds itself at war—with itself.
Germany’s heroic insistence on monetary discipline is pushing the over-indebted Eurozone to the brink of breakup—the very event that German exporters fear the most. And they include the vast Mittelstand of family-owned companies. Already, German industrial orders have started to nosedive.
Exporters are panicking: orders fell off a cliff during the financial crisis, leading to the worst quarterly GDP declines in the history of the Federal Republic: -2.1% in the fourth quarter of 2008 and -3.8% in the first quarter of 2009. Annualized, those two quarters printed a double-digit decline in GDP. The German economy lives and dies by its exports.
Ironically—though Germans conveniently don’t remember—it got pulled out of its funk by the Fed which printed and handed out trillions of dollars, a big chunk of which we now know went directly to German banks and indirectly to German exporters. So monetization bailed them out last time though it wasn’t their money that was devalued.
That’s the schizophrenic duality Germany finds itself in. No event brought this out more harshly than Germany’s reaction to the news that the ECB studied using national reserves, including Germany’s gold and Special Drawing Rights (an IMF-issued quasi currency), as a way to increase the firepower of the misbegotten European bailout fund, the EFSF.
France knows no such duality. Yesterday I watched Valéry Giscard d'Estaing, President of France from 1974 - 1981, hold forth on French national TV about the debt crisis and the government’s response to it (fear and belt-tightening ... six months before an election). During the discussion, the center-right politician proudly stated that when he was booted out of office in 1981, France's national debt was a minimal 14% of GDP.
What he didn't say was that the French government at the time had been funding its budget deficits through various government-owned financial institutions and through monetization by the Bank of France. Nor did he mention France’s history of inflation, devaluation, and “currency reform.” The French franc was most recently “reformed” in 1960, when 100 francs were converted to 1 new franc. Alas, in its 40 years of existence until the euro took over, the new franc lost 86% of its value.
Which makes Germans gag. By comparison, Italy, Spain, and other countries had far worse inflation and devaluations.
Monetization as a policy goal has now shown up in French political campaigns. During the primaries, candidates on the left—the winner, François Hollande, has a good chance of dethroning Nicolas Sarkozy—have called for solutions that ranged from greater flexibility by the ECB to outright and automatic monetization of Eurozone sovereign debt, similar to how it was done when Giscard d'Estaing was President. On the far right, Marine Le Pen called for an end to the euro itself.
Their logic is that before the advent of the euro, no one doubted that France and Italy would be able to pay their bills, albeit with increasingly worthless currencies. Sovereign default wasn’t even part of the discussion, though it is today.
But to maintain the sacrosanct value of the euro, Germany resists pressures to monetize troubled sovereign debt though it would save the Eurozone and the very export markets that the German economy depends on. Fear of inflation and devaluation is an integral part of the German soul, formalized by its central bank and constitution. And monetization, a solution that seems so glaringly obvious to other countries, is seen as the threat that it actually is.
Now, as the quixotic war against Eurozone deficit addiction and excessive debt is falling apart, and as affected economies are careening out of control, German industry fears for its export markets. And suddenly, Germany finds itself at war: on one side is its soul, whose spokesperson is the Bundesbank; and on the other is its dependency on exports.
At some point, after all bailout efforts have failed, one side will prevail. Germany will either come around and support “saving” the Eurozone, and thus its industrialists and banks, through monetization of debt—and lose part of its soul in the process. Or it will exit the Eurozone in disgust to revert to the Deutsche Mark or to start a smaller monetary union it can control—and lose crucial export markets in the process.
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Wolf Richter www.testosteronepit.com