Friday, February 20, 2009

Not all Germans desire a Union of Debt


German Finance Minister Peer Steinbrueck has indicated that Germany is prepared to bail out suffering eurozone countries. This appears to signal a shift in German thinking - the prevalent view in the past was always that that struggling countries would have to find a solution themselves, like it or not.

The reason behind Steinbrueck's U-turn is not all that clear - at least partially it could well come down to the overexposure of Austrian banks to the economic woes of Central- and Eastern Europe. The WSJ reports that Eastern European borrowers need to repay about $400 billion in debt owed to Western banks this year. According to a report by Swiss bank UBS, much of that amount is denominated in foreign currencies, making the situation worse as Eastern European currencies have lost value. In other words: Europe could soon be faced with a subrpime crisis of its own, this time coming from the East. Also Swedish, Greek, Italian, and Belgian banks are heavily exposed. So Steinbruck wants to help.

However, not everyone in Germany agrees with the Finance Minister - to say the least. Heavyweights such as the former Chief Economist at the ECB, Otmar Issing, for instance. Issing recently told the Frankfurter Allgemeine Zeitung that it would be a catastrophe to water down the “no bailout” clause in the EU treaties, arguing that it would spell an end to "the political stability of the monetary union”. Article 103 of the EU Treaty, for those of you not familar with this particular section of EU law, states that neither the European Central Bank, the EU, nor national governments shall be liable for or assume the commitments for other national governments.

Issing thinks that in order for financial discipline to prevail every member state must be responsible for its own debt and deficits: “without this there would be no end”, he says.

In an article in Der Spiegel, the current ECB Chief Economist J├╝rgen Stark concurs, saying: "the ban preventing the EU and its member states from taking responsibility for the debts of partner countries is an important foundation needed for the currency union to function."

Meanwhile, the Financial Times Deutschland quotes "an expert" saying that a German bailout operation of other eurozone countries “could cost the taxpayer about 1.5 billion euro per year” (Simon Tilford of the CER calls such concerns "parochial"). According to the article, the such bailout could take the form of:
  • Direct aid,
  • The creation of a large fund through the European Investment Bank, which would buy up the bonds from countries in difficulties, or
  • The common issuance by members states of bonds.
Interestingly, Standard & Poor’s says in the FTD article that an "EU bond" would only receive an “A” rating, due to Greece’s low creditworthiness.

In any case, there is a "no bailout" clause in the EU Treaty, so the discussion should really be academic at this point. Because we all know how good the EU is at sticking to the letter of the law when things get a bit hot...

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