Can Germany Carry Europe’s Weight In The Next Financial Crisis?

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Submitted by Erico Tavares of Sinclair & Co.

Can Germany Carry Europe’s Weight in the Next Financial Crisis?

Within the European economic context Germany has been a star performer in recent years, outgrowing in GDP terms its Eurozone peer group as a whole in all but one year since 2006 (complete with a magnificent football/soccer team). This was quite a reversal of fortune from the ten years prior, when Germany consistently lagged in wealth creation.

Together with its size and unwavering historical commitment to the EU project, this has created the expectation in political and even financial circles that if Europe faces another major economic crisis Germany will have no choice but to support the most vulnerable member states, possibly even relenting to the mutualisation of the Eurozone's debts.

While this is a very complex topic, the following graph puts the odds in favor of one outcome: the next time push comes to shove in a big way, Germany will likely say NEIN!

Evolution of Government Debt-to-GDP in Selected European Countries
(Source: EuroStat)

(a) Simple average of the Netherlands, Denmark, Finland and Sweden.

Several notable facts stand out from this graph:

Since 1995, Germany’s government debt-to-GDP ratio increased by almost 50% from trough to peak. This increase is particularly evident when compared to Germany’s Northern European peers (the EU Nordic countries plus the Netherlands, also traditionally fiscally-prudent exporters) and even its much smaller and historically more indebted German-speaking neighbor, Austria.

The reunification is undoubtedly a major reason behind this increase... This is a major political, not economics, project but the financial ramifications are quite significant. While we could not find official figures of how much has been paid to date to shore up the eastern half of the country (probably because this is a sensitive political topic), some think tanks estimate somewhere in the vicinity of €1.5-2 trillion. This is a very large figure indeed, easily exceeding half of current GDP levels.

… and is still costing a lot of money. Twenty years on, an estimated €70-90 billion a year are still flowing east through various support mechanisms, including the renewed Solidarity Pact that is projected to last until 2019. West German politicians clearly underestimated how much the reunification would cost. How can we tell? In 1992, as part of the Maastricht Treaty Germany agreed (and most likely pushed) to have a 60% government debt-to-GDP limit on all EU member states (they were at 42% then); but then it took them just six years to breach that level, despite a relatively benign economic environment throughout the 1990s. Oops.

What about the banks? Contingent government liabilities, including exposure to potential financial sector losses, are not included in this graph. As will be outlined in a forthcoming article, prior bank stress tests and rating agency notes suggest that European banks could need help yet again in case of another financial crisis. This could throw another wrench at government finances across the board.

And what’s going on in France? French politicians did not have to worry about funding a massive reunification effort, but that did not stop them from keeping pace with Germany’s debt increases as percentage of GDP. And from 2009 they finally got ahead and never looked back... Allez les Bleus (Go Blues)! While we speculate that expensive social programs and lenient working hours may have something to do with it, for whatever reason France’s fiscal policy looks truly extravagant compared to all other countries in this graph.

***

Where does this leave us? German taxpayers are still coping with the reunification and a national debt that is much higher than they ever expected. So while many European politicians continue to push for more “solidarity”, Germany is in short supply of financial resources, let alone political will, to bail out other member states.

And France, Italy or Spain, which together with Germany account for 55%+ of the EU’s GDP, are in a worse position - nobody saved for a rainy day. And many states across the EU are still reeling from the last financial crisis.

If global growth picks up considerably from here, a lot of these issues could be postponed or even fall away. But it’s the scenario where it does not that concerns us.

Anything could happen then, including politicians throwing all remaining caution and financial orthodoxy to the wind. After all, Germany pushed its leverage up a full 17 percentage points from an already stretched level in response to the recent financial crises – making the prospect of going back to the 60% debt level unattainable in a decade, if not much longer. France, Germany’s big partner in the EU project, already seems to be going down that path with gusto.

However, at some point this policy could have unpredictable consequences, especially if financing costs in certain states begin spiraling out of control. Central banks can continue to provide liquidity and – to a measured degree – hold interest rates down to ease the debt burden, but they can’t restore solvency on their own. Social and pension programs, economic growth, the ability to backstop the financial system and even cohesion within Europe could all suffer as a result.

All this makes us wonder: does Europe have a credible Plan B in case Germany does not show up with the goods next time around? European bank depositors should be very concerned, and indeed everyone else for that matter.

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Sun, 07/27/2014 - 09:22 | 5009386 Notsobadwlad
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It is a stupid question.

Countries do not create and distribute money. bankers do. Bankers decide which countries will have lots of money and which countries will have little money.

Sun, 07/27/2014 - 09:38 | 5009408 GetZeeGold
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Bankers decide who gets to keep their gold.....and who doesn't.

 

Can we really trust Germany with gold?

Sun, 07/27/2014 - 09:40 | 5009415 Escrava Isaura
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new GetZeeGold,

Is this a serious question?

Sun, 07/27/2014 - 09:41 | 5009417 Keyser
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If Germany were smart, they would tell the EU to go fuck themselves and align with the BRICS countries... 

 

Sun, 07/27/2014 - 09:49 | 5009427 Notsobadwlad
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More importantly, if Italy, Spain, Greece, Portugal, Ireland and central European countries were smart they would tell the ECB to pound sand, join the new BRICS block and leave Germany, France, Belgium, the Netherlands, England (yes I know not a full member) and the Nordic countries to discuss old times and their common interests.

Sun, 07/27/2014 - 09:57 | 5009441 old naughty
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It really boils down to one critical question:

Was the EU created to benefit the member states, or to control them.

If the latter, and if Germany is given the trophe to lead, as in the World Cup, then YES.

Welcome to the NWO.

Sun, 07/27/2014 - 10:01 | 5009451 Arius
Arius's picture

I think even Greece spends 3.4% of GDP on Nato and war equipment, whereas the German taxpayers spend only 1,1% .... give and take they got to do smt more than the rest ... i understand the importance of Frankfurt though ...

Sun, 07/27/2014 - 10:23 | 5009492 Headbanger
Sun, 07/27/2014 - 10:40 | 5009507 Leonardo Fibonacci2
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Sieg Heil Mein Fuhrer

Sun, 07/27/2014 - 10:59 | 5009522 Escrava Isaura
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old naughty,

Germany is the Emperor of EU. Where do you think Germany export its surpluses?


Keyser,

By Dubaibanker: There ARE no BRIC’s. There's only China.

Sun, 07/27/2014 - 11:03 | 5009531 Keyser
Keyser's picture

The EU is dragging Germany down and now with the new sanctions the EU wants to impose on Russia, it places Germany in a sensitive place as they have over 2000 companies doing business in Russia, not even mentioning that 40% of the oil and 30% of their natural gas supplies come from Russia... German exports will not change if they abandon the EU as Germany has proven they are a manufacturing powerhouse and leads all of the EU economically... If I were the strongest player in the block I would not want my neighbors dragging me down... 

Sun, 07/27/2014 - 11:29 | 5009590 FeralSerf
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You might not want your neighbors dragging you down, but like the strongest businesses in Detroit during the last 30 years you might have no choice. The strongest in Detroit moved. Can Germany move out of Europe? I think not.

Sun, 07/27/2014 - 11:38 | 5009611 old naughty
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The NWO agenda is border-less with single controlling body.

You think they talk who's who? No, they say fuck EU, etc.

Name is given to be pointing fingers at, BRICS, G20, they are of no importance.

If they succeed in narrowing the world down to three regions, next up will be the number reduction. And then humans will be "transformed".

Remember: "Resistancwe is futile"?

Time to WTFup.

Mon, 07/28/2014 - 06:35 | 5011927 Ghordius
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"Was the EU created to benefit the member states, or to control them" - first, it's countries, not states. second, it's the countries that control the EU. third, regarding benefits... what are the options? go full "free trade"? no, thanks

Mon, 07/28/2014 - 11:46 | 5012890 FeralSerf
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What's the difference between a country and a state?

Sun, 07/27/2014 - 10:37 | 5009505 piratepiet
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are you really advocating the BRICS bloc as an alternative to the Eurozone ?  Brics : 4 continents, 5 currencies, no common history or culture, hundreds of languages... Hardly a bloc.  What unites the Brics seems to be their ( maybe not unjustified ) resentment versus US and EU.  And you want Southern Europe and Ireland to join that 'bloc'.  Funny perspective.   

Sun, 07/27/2014 - 10:54 | 5009520 shouldvekilledthem
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Why does it matter when it'll be the same scam, only with a different frontend?

All hail our banker overlords.

Sun, 07/27/2014 - 11:05 | 5009537 Keyser
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Because the BRICS are not controlled by the Rothschilds and their network of central bankers... Are you really that dense?

Sun, 07/27/2014 - 21:11 | 5011149 old naughty
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I wouldn't be so sure...

Just like when someone tells you 100 years ago the Fed...etc

Check out the story (his-story?) Five in 1913 Austria...

Hint: Did Karl Marx "invented" communism or invented for him? Who funded the key people to go "study" in France (of all places?) before CCP was established...and so on.

And who first coined BRIC / BRICS ?

What can be seen is temporal (fill in the rest yourself).

The invincible hand is stirring persistantly. 

Sun, 07/27/2014 - 11:06 | 5009538 Keyser
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Because the BRICS are not controlled by the Rothschilds and their network of central bank... Are you really that dense?

Sun, 07/27/2014 - 11:29 | 5009591 123dobryden
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they are  only controlled with somethng less advanced and less civilized

Sun, 07/27/2014 - 11:32 | 5009596 FeralSerf
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Don't underestimate the Rothschilds. They have a HUGE investment, and consequently amount of control, in the BRICS.

Sun, 07/27/2014 - 11:54 | 5009647 piratepiet
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I do not know how big the group is that you designate by "The Rotshilds", but somehow I suspect ( do not know ) you could be in for a nice surprise as far the links between the financial elites of Brazil, South Africa , India and the Western financial elites are concerned.  Russia and China might be another matter, but I simply do not know.  

All the central banks of the Brics seem to be members of the Bank of international settlements ( BIS ).

http://en.wikipedia.org/wiki/Bank_for_International_Settlements

 

Sun, 07/27/2014 - 11:08 | 5009542 123dobryden
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we are advocating joining so called free trade blocks only because we have no free trade

Sun, 07/27/2014 - 11:15 | 5009557 LostandFound
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You forgot to mention nearly 40% of the world population in 5 countries as well. 

Sun, 07/27/2014 - 11:25 | 5009578 piratepiet
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sure,  but a few billion people does not mean a few billion united people

Sun, 07/27/2014 - 11:44 | 5009626 FeralSerf
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Not necessarily!

The principles of control of the masses are just as true in the BRICS as they are in the western would. Those principles are being USED RIGHT NOW to unite billions of people to do the bidding of their masters that control the earth's media empires. This is the reason large media empires (without any serious competition) are so valuable.

If you, and all your fellow citizens, are locked up in a concentration camp -- and our current system of "nations" are really just large concentration camps -- and continuously fed a dogma of propaganda, you will eventually be trained to do the bidding of the propagandists. If you're part of the small minority that can't be trained, you can be culled instead.

"If we understand the mechanism and motives of the group mind, it is possible to control and regiment the masses according to our will without them knowing it." -- Edward Bernays

Sun, 07/27/2014 - 12:22 | 5009723 piratepiet
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yeah, the value of media empires is mind boggling indeed.  Murdoch offered 80 billion USD for Time Warner wtf..and still not enough ? 

Sun, 07/27/2014 - 12:35 | 5009749 FeralSerf
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Considering what these media empires have accomplished for their owners, it's fair to say they're "priceless".

How much is the position "Emperor of Earth, Winner Take All" worth?

Murdoch and his ilk, as the enablers and co-conspirators of the deaths and enslavement of billions of humans, are guilty of crimes against humanity. They are terrorists. Their lies are similar to the liar -- but MUCH WORSE -- that stands up in a crowded theatre and yells "fire" solely to stampede the people and watch them die.

If we or our descendants are to have any freedom left, these giant media empires MUST BE BROKEN UP and the toxic, radioactive pieces buried forever.

Sun, 07/27/2014 - 14:27 | 5010019 piratepiet
piratepiet's picture

What you write does not really resonate with me.

I have some humble advice for you : Moderation in all things, not least in your judgements about others. 

But then again, there is so much I do not know, and you are probably just be probing me. 

Sun, 07/27/2014 - 09:50 | 5009428 GetZeeGold
GetZeeGold's picture

 

 

GetZeeGold, Is this a serious question?

 

Dunno......do you think it's a serious question?

Sun, 07/27/2014 - 10:05 | 5009459 Greenskeeper_Carl
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they won't. they can't. They are far douche bank has the largest derivitives exposure of any bank in the world. Interest rates move too far, too fast, they are wiped out, insolvent(i would call them insolvent now, so the illusion of their solvency is wiped out). Why do you think they have been so quiet about getting their gold back? because they have to choice, and the bankers have them by the balls. Unless they are willing to let douche bank fail, they will do whatever they are told

Sun, 07/27/2014 - 11:25 | 5009566 Kirk2NCC1701
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Makes sense until you realize that db can simply leverage its derivatives to buy whatever gold reserves they want to rebuild.

In fact, given the low price of gold, it's surprising that more countries aren't doing that. I suppose that the Fed is seeing to it that this does not happen, they are somehow preventing a gold run. For now.

Sun, 07/27/2014 - 10:48 | 5009515 McCormick No. 9
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They already are in secret negotiations with BRICS. But, damnit, who is going to run the BRICS Central Bank? My guess is, just another member of the banking tribe.

Sun, 07/27/2014 - 11:15 | 5009553 barre-de-rire
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they want, but they can't.

 

structural prisonner.. any move out of the sideway and EU bus ready to smash

in the text it has never been predicted that a country could leave EU...

very significant.

Sun, 07/27/2014 - 12:04 | 5009673 Colonel Klink
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When do Hans and Franz shrug?

Sun, 07/27/2014 - 18:12 | 5010679 Monty Burns
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Can we really trust Germany with gold?

Redundant question as they'll never get theirs back from the Fed.

Sun, 07/27/2014 - 09:37 | 5009410 Escrava Isaura
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Notsobadwlad,

Thanks!

Next?

Sun, 07/27/2014 - 09:47 | 5009426 piratepiet
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Maybe, but bankers alone can not give that money some value. 

Sun, 07/27/2014 - 09:53 | 5009434 Notsobadwlad
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I see.

What are the other steps required, other than setting commodity prices through control of the markets, setting foreign exchange rates with each other and purchasing the laws they want, including monopoly status for their currency?

Sun, 07/27/2014 - 10:05 | 5009462 piratepiet
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just printing money does not give money value.  Commodities need to be mined/produced, roads build, inventions invented, wars fought ( to back a petrocurrency for example in case of the US ), the public (mis)led ... Go off and be a banker in.. let's say Malawi.  Are you gonna make it the country with most money/wealth soon ?

Sun, 07/27/2014 - 10:40 | 5009503 Notsobadwlad
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To understand what is going on, one has to understand that the vast majority of bankers are tied together through a network that is tied in each country to their central bank and then the majority of the central banks to the Bank of International Settlements (BIS). The banks will be the central control system should there ever be a global empire and one global currency.

Independent country banks are not allowed. Iraq, Afghanistan, the Sudan, Libya, North Korea, Syria, Venezuela, Cuba and Iran all have (or had) independent central banks and so they were or are targets of aggression. When the west invaded Libya (a country that had the highest standard of living in Africa and was organizing an independent African union) a BIS tied central bank was set up in Benghazi before Gaddafi was dead or Tripoli had been conquered. Iraq and Afghanistan now also have BIS tied central banks. (Watch ISIL and see what happens with the Iraqi central bank. This will be a big clue into who is really behind ISIL... my guess is that this is an attempt to end-run Assad and his control of his own money system)

You talk about mining, etc. Banks decide which projects/inventions are funded, which governments get money for wars and the rules/covenants under which they will be funded. Those who go along get funded and get rich and those who do not get destroyed or swallowed up. Banks also determine price for commodities.

Sun, 07/27/2014 - 10:55 | 5009521 piratepiet
piratepiet's picture

ok good point as far as funding decisions are concerned, these give banks a lot of power indeed. 

However, I believe some banks are under a ( quasi-) obligation to buy governement bonds ( or at least in an impossibility not do so as not doing so would be to their own detriment )  The banking world and governements are really hand in glove, the political world and banking world need each other, a collusion between bankers and politicians if you like.  So I do find that the very common idea here on zerohedge that bankers rule the world needs a bit of pushback.  E.g. World War three starts : is Lloyd Blankfein or Jamie Dimon going to address the American public ?  I do not think so.  They will desperately need politicians to do that, and that gives these politicians tremendous power as well.     

"Independent country banks are not allowed"

Where does China fit in here ? 

 

Sun, 07/27/2014 - 11:50 | 5009641 FeralSerf
FeralSerf's picture

Lloyd Blankfein and Jamie Dimon already OWN plenty of politicians. They don't "desperately need politicians" anymore. They have been investing (and still are) at a huge rate to keep their empires intact (and to stay out of jail for all the felonies they've committed).

Sun, 07/27/2014 - 12:07 | 5009679 piratepiet
piratepiet's picture

I do not believe that "own" is a fair characterization of the power dynamics at play between bankers and top politicians.  They need each other really.  I do agree bankers have way more power than the public at large is aware of.  And maybe many people are just waking up to that fact and in that process they are exagerating a bit ( as you are ).  Bankers are not all powerfull in my opinion.  The world is a bit more complex.  But if you really believe otherwise, I would say you have lost hope, or are being megalomanic ( if you are a banker yourself ). Pick your poison. 

Sun, 07/27/2014 - 12:23 | 5009724 FeralSerf
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The history of the 20th Century and the current Anglo-American political administration suggest the banking families have consolidated their control of the political process in America, and the rest of the world too, due to Anglo-America's domination of the world economy and the military domination to back it up.

Yep, I've lost hope.

Sun, 07/27/2014 - 11:10 | 5009544 max2205
max2205's picture

Douche Bank detonates and we'll be asking moar serious questions

Sun, 07/27/2014 - 10:02 | 5009448 junction
junction's picture

First, there is no Plan B.  For the past 25 years, countries across the world have been pillaged by their rulers.  Russia had its Yeltsin, who gave away state owned industries to economic autocrats, Mexico under the Salinas brothers let druglords run wild and privatised TelMex, letting Carlos Slim buy it for no money down.  In the USA, Clinton had NAFTA and allowed massive outsorcing in general, wiping out the country's industrial heartland in the process.  This  government sanctioned looting on an international scale is the reason we have so many multi-billionaires now.  Even Mao's grand daughter is now worth $500 million. As the U.S. middle class was wiped out by excessive taxation, it now turns out that the rich guys, the hedge fund operators, paid little or no taxes thanks to tax exemptions written into the U.S. tax code by a corrupt Congress.  The world is now a thieves' bazaar.  The chances of these crooks at the top ever facing any sort of punishment is about the same as a sadistic New York City cop being punished for applying an illegal  chokehold on a black guy.  1 in a 1,000.

Sun, 07/27/2014 - 11:38 | 5009610 disabledvet
disabledvet's picture

Yep. Perrty much.

They will have to confront Putin's Russia...something fraught with peril. Unlike in 1941 however where they had a "go it alone approach" I think many in the region are ready for the first baby step of real collective security and a Europe "whole and free." This stands to benefit Germany enormously....but it is highly risky.

Russia is not going down in Ukraine without a fight.

Sun, 07/27/2014 - 11:20 | 5009568 doctor10
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