Germany has been the staunch opponent of some of the most promising ideas to end the eurozone crisis—common euro area bonds, enlarging the mandate of the European Central Bank, and drastically increasing the size of the European bailout fund.
With new leadership in France and Greece, Germany could face more resistance on these issues, as politicians move away from austerity and towards policies that will preserve growth.
But despite professions of support for growth measures, Chancellor Angela Merkel and Germany are unlikely to change their tune.
That’s because Germany has been one of the primary winners of the policies that kept Southern European economies weak. Its resilient economy continues to withstand the recession hitting the eurozone periphery; indeed, unemployment continues to be at record lows.
Until Germans realize the scale of the negative consequences they will face in the case of a eurozone break-up, resistance to swallowing the debts of peripheral nations is likely to continue.
Germany has been taking advantage of its power to flout eurozone rules for years.
Back in 2003 and 2004, Germany and France lobbied to circumvent the Stability and Growth Pact that limited countries’ expenditures and the size of their deficits.
Strict adherence to this pact would have (arguably) prevented countries like Italy, Portugal, and Greece from spending beyond their means
Further, French and German banks lent huge sums to the periphery.
Average quarterly consolidated claims by the banking sector by country, from Q1 2005 to Q3 2011.
French and German banks invested significant amounts of money that drove demand for products from their Southern neighbors. The figures above are denominated in millions of euros.
Last year, Greek GDP amounted to $308.3 billion and Italy’s GDP totaled $1.82 trillion. Thus, lending from France and Germany equal 38 percent and 40 percent of GDP for those countries, respectively.
Source: CIA World Factbook and Bank for International Settlements
Meanwhile, Germany undertook labor reforms and passed legislation to keep wages down.
Resulting in historically low unemployment rates that have little in common with the rest of Europe.
In fact, German unemployment has sunk since Lehman collapsed, while it has risen in every other country during that time period.
High external demand and low costs of labor resulted in an export economy…
But created massive fiscal imbalances in the eurozone.
Germany was one of the lenders that fueled unsustainable borrowing, generating huge demand for new cars even as Greece sunk into a fiscal hole.
Thus, Germany’s export-led economy has been expanding even as the rest of the eurozone contracts, and it appears not to be feeling the effects of the crisis…yet.
Competitiveness has led Germany to pay far less to borrow than its European counterparts.
From the bottom, German (light red) and French (green) interest rates have sunk slightly while Spain’s (orange) and Portuguese (deep red) yields have risen, despite falling inflation.
Amid more doubts that peripheral sovereign debt is sustainable, deposits are fleeing banks in those countries for Germany and the European core, compounding the problem.
Now responsible for the lion’s share of bailout funds and still relatively unaffected by the crisis domestically, Germany has little desire to lose any more money to bail out the periphery.