Angela’s ashes: Is Germany ready to burn the Euro?
German Chancellor Angela Merkel returned from her summer holiday in South Tyrol, Northern Italy, this week, a popular destination for hikers. But the precipices and sheer drops of the Dolomites are nothing compared to the treacherous eurozone landscape that Merkel now faces. This, coupled with recent significant shifts in Germany, has made a previously preposterous question irresistible for European commentators: could Germany be the first country to jump off the single currency cliff?
Signs that eurozone countries are sinking further into atrophy have come from all directions this week. Italy’s economy has shrunk for the fourth quarter straight. Greece on Monday announced that its GDP had plummeted by more than six percent year-on-year. And Spain’s yields on ten year bonds hit record highs not long ago.
But, let’s face it, these countries’ economies have been stewing in the juices of their own slow decomposition for some time. What has started quietly shifting in recent weeks is Germany’s toleration level when it comes to the euro crisis.
Greece in particular is testing German patience. Top statesmen including Michael Fuchs, the deputy parliamentary leader of Germany’s conservative bloc, have called for Germany to veto Greek aid if Athens misses its austerity targets. More widely, Germans are fearful of the euro crisis and nostalgic about life before the single currency. A recent survey found that half of Germans think they will be directly affected by the eurozone crisis. Another showed that 56 percent of Germans think the former deutsche mark currency is superior to the euro.
Crucially, German tolerance is, if anything, only set to decline. This is because the German economy, which until now has been bullish despite the eurocrisis, is losing momentum. On Tuesday the country posted growth of 0.3 percent in the second quarter, which constitutes a slowdown. Germany’s exports, the secret to its economic success, are dwindling, stoking fears that the country will soon be suffering from economic stasis.
These subtle changes in Germany raise important questions about the future of the country’s commitment to the euro. So far, theories are mainly confined to Germany masterminding a Greek exit or booting out troubled southern eurozone countries, stopping short of Italy. But they do not go far enough. That Germany, and not Greece, could be the first country to leave the eurozone altogether, prompting the complete collapse of the single currency, is a possibility that should not be ruled out.
Outright sceptics should remember this: experts were betting that Greece would vote itself out of the euro via the general election in June, which turned out to be erroneous. That misjudgement underlines just how difficult it is to predict the direction of the European saga. This unpredictability should invite a greater willingness from analysts to experiment with different scenarios, however unlikely they might at first seem.
That said, many will think the idea of a German exit completely bonkers. Firstly, for now, Germany is responding to the euro crisis by supporting deeper integration, rather than seeking to cut ties. Finance Minister Wolfgang Schaeuble and Foreign Minister Guido Westerwelle are calling for a German referendum on EU integration, something they are confident they can win. And, up until now, Merkel, by pushing for the creation of the European Stability Mechanism (ESM) and the fiscal pact, has been willing to go so far as to stretch interpretation of her own country’s constitution to the very limit in order to save the euro.
Secondly, a German departure from the Euro would also seem to be economic and political suicide for Merkel. UBS estimates that the unravelling of the single currency would slash the country’s GDP by up to a quarter with immediate effect and cost every German up to 8,000 euros in the first year. The other prospect of bailing out European countries instead is much cheaper. Merkel has also reaped huge domestic political benefits by carving out an image for herself as the crisis manager of Europe. German voters could interpret eurozone retreat as defeat, leaving her reputation in tatters.
But these arguments, however valid, overlook the crucial point that if Italy cannot avoid economic meltdown, Germany’s leader may soon not have the luxury to make decisions purely by weighing up pros and cons. That Italy could single-handedly bring down the euro is a well-rehearsed fact. Should Italy request a bailout worth a conservative 40 percent of GDP, in line with other countries like Spain and Portugal, it would need 675 billion euros, far more than the ESM’s total capacity of 500 billion Euros. Then Merkel’s choice would be between holding on and printing more money in a last bid to save the euro, risking chaotic disintegration, or cutting Germany’s losses and opting for a dignified departure.
The dithering commitment that Germany has shown to saving the eurozone is perhaps an indication that, under pressure, Merkel might choose the latter path. The German leadership has demonstrated a dangerous capacity to procrastinate over the euro crisis, despite the urgency of the situation. And Germany has been reluctant to increase its liabilities in Europe, even though it is necessary to prevent the eurozone’s collapse, at least in the short term. Such hesitation betrays the fact that it probably already has one eye on the exit door.
And politically, it is possible for Merkel to oversee Germany’s exit from the eurozone and still be re-elected as chancellor in the German general election next year. The polls show that Germans are strongly against further bailouts for European countries and fed up with the problematic euro. A dignified exit may allow the chancellor to preserve some of her status as the German protector. And because right-wing parties tend to be more popular in periods of economic turmoil in Germany, voters are likely to opt for Merkel over any other politicians to see them through the storms of post-euro collapse. Europe’s iron lady could even gain popular endorsement for leaving the euro and insurance against post factum criticism by holding a referendum on a German exit beforehand.
“The euro is our common fate,” Angela Merkel once famously said in German parliament. But the chancellor knows better than anyone that fate is not the religion of politics. Control and damage control are. That is why a German departure from the eurozone should not be ruled out.Tagged in: Angela Merkel, bailout, Euro-crisis, germany, greece
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