With the final approval of Germany’s supreme court in hand, Germany can now legally join the latest eurozone bailout attempt in the hopes of offering more time and more stability to an area still roiling with the fallout of sovereign debt crises in multiple states. While the citizens and governments of many other European countries would no doubt deeply resent the idea of the European Stability Mechanism (ESM) as a “German bailout,” make no mistake – without Germany’s ongoing participation and financing, there would be serious turmoil in European financial markets.
In for a Pfennig, in for 190 Billion Euros
With the approval of Germany’s supreme court in mid-September, the ESM can now move forward as the latest effort to stem the ongoing chaos caused by the sovereign debt troubles in countries like Greece and Spain.
Because of the nature of the ESM, multiple levels of ratification were needed across the eurozone, but Germany’s approval was the real key. Roughly 27% of the anticipated capital/lending capacity was to come from Germany (with France chipping in 20%), but I think the reality could end up being even larger. Italy and Spain are both expected to make meaningful contributions to the ESM at 18 and 12%, respectively, but I wouldn’t hold my breath. I’m not sure that Spain is in any position to be sending money out of the country, while questions about whether Italy is the next to fall continue to swirl around the markets.
In addition, it’s not as though Germany has not already contributed a lot to the cause of eurozone stability. There was 22 billion euros in the first Greek bailout, 253 billion euros to the European Financial Stability Facility and 94 billion euros to ECB purchases of sovereign bonds, and that’s only a few of the highlights. Add it all together, and Germany’s commitments to its neighbors could top 30% of its GDP.
How Much More Will Germany Support?
With potential commitments comprising such a large percentage of Germany’s GDP, it’s fair to ask how much more Germany can afford to spend in supporting the euro. That’s particularly relevant, given the slowdown in emerging markets like China – a major customer of exported machinery and tools from Germany. It’s not just a question of ability, however – it’s also worth asking if Germany wants to do more.
There have been increasing concerns and complaints within Germany about the extent to which the country is endangering its own financial security for the benefit of non-Germans. While this has thus far been successfully rebutted by arguments that the health of the euro is integral to Germany’s economic health, patience seems to be waning and Germany’s ESM participation came with notable conditions attached (including a cap on Germany’s contribution).
It’s not helping matters that the beneficiaries of Germany’s efforts are not exactly bending over backward to reform or thank Germany for its efforts. Strikes and protests continue across Greece, largely in response to the austerity efforts mandated by the funders of the bailouts. Likewise, Spain has stubbornly held out on committing to additional requirements and conditions for further funding – apparently betting on the idea that countries such as France and Germany stand to lose enough from further erosion in Spain (or an exit from the euro) that they’ll ultimately cave and provide additional funding without restrictions.
Will This Latest Effort Really Help?
Arguably, the biggest question is whether Germany’s ongoing participation in efforts like the ESM are ultimately going to effectively “save Europe.” Unfortunately, there’s still no clear answer and the indications seem to be negative.
Greece, Spain, Portugal and (arguably, to a lesser extent) Italy, all have serious economic issues. Greece and Spain, for instance, have small industrial bases and produce relatively few manufactured goods that people or businesses in other countries want to buy. This leaves them with economies more heavily leveraged to internal services and lower value-added industries, such as tourism and agriculture.
Making matters worse, bureaucracy and regulations make starting and running new businesses quite difficult, and tax evasion is very nearly an art form in many cases. What’s more, all of these countries offer the sort of social benefits that are common in the eurozone (though austerity measures have started to change this).
There is a case to be made that bailout efforts, such as the ESM, can give countries time to get their affairs in order and emerge with more viable economic policies. That was part of the argument in favor of bailing out U.S. banks, and it was arguably proven correct – cheap money did seem to allow many banks to stay in business that could have otherwise been forced to shut down. Unfortunately, buying time for an industry is not the same thing as buying time for a country. At a minimum, the high unemployment and civil unrest in Spain and Greece demonstrate the difficulties of forcing new rules or reforms on a sovereign country.
Consequently, there is a real chance that Greece and Spain cannot be saved, at least not in the context of keeping them within the eurozone. Austerity measures have hurt employment and business activity, making budget deficits worse and potentially threatening even more serious austerity measures. While exiting the euro and allowing their currencies to depreciate could speed up the process of normalization, staying within the euro looks as though it’s going to lead to a lost decade for these bailout recipients.
A cynical analysis might conclude that the point of bailouts isn’t to save Greece or Spain, but rather to buy time for banks, insurance companies and other concerned parties in healthier countries such as Germany, France and the Netherlands, so they can adjust their exposures to the affected countries and effectively immunize themselves. Once the banks are safeguarded and stabilized, there’s less risk to these countries, as their economies don’t really revolve around trade with Spain or Greece.
Consequently, I don’t think Germany’s recent efforts are going to save Europe. Rather, they’re going to restore a little stability and confidence to the financial markets and allow the healthier eurozone countries to get their banks and credit exposures in better order. If Germany and France can offer enough liquidity to the markets to get their financial sectors over the hump of this sovereign debt crisis, then history probably will regard their actions as having “saved Europe,” even though Spain and Greece are likely in for a lot more trouble and pain.
Stephen D Simpson can be contacted at Kratisto Investing