Friday, June 29, 2012

Germany Budges

The Lehmann Letter (SM)
Once again the European nations have decided to hang together rather than hang separately. Their efforts to save the Euro appear to bring them more rapidly together rather than drive them apart.

Chancellor Angela Merkel said it wouldn’t happen, but…….

Yesterday Germany made major concessions to support the Euro.

As The New York Times reported in today’s edition:

“European Leaders Agree to Use Bailout Fund to Aid Banks”

“Mr. Van Rompuy (president of the European Council) called the agreement a “breakthrough that banks can be recapitalized directly,” which represents a concession by northern European countries, including Germany. The leaders agreed that the euro zone’s permanent bailout fund, the 500 billion euro European Stability Mechanism, due to come into being next month, could recapitalize banks directly once a banking supervisory body overseen by the European Central Bank has been set up. That should happen by the end of the year, he said. The joint banking supervisory body is also a breakthrough, an effort to ensure the future health of the area’s banks, but details about that component of the agreement were scarce….

“Italy and Spain were supported in their efforts by the new French president, François Hollande, who arrived here on Thursday demanding “rapid solutions” to the euro’s problems. But Chancellor Angela Merkel of Germany gave little sign of budging on any quick fixes, arguing that existing mechanisms could be used, illustrating some of the deep divisions as European leaders try to restore faith in the single currency….”

Then the article goes on to say that Germany did budge

“…Mr. Monti told the other leaders that Italy would not agree to any other issue here until there was serious discussion of how the union could help bring down interest rates on Italian bonds, and Mr. Rajoy, under even more pressure from the markets, joined him….

“In a speech on Wednesday to German lawmakers, Ms. Merkel argued that short-term solutions like pooled debt would be counterproductive without the construction, first, of a political and economic union among the member states in the euro zone. Without mutual responsibility and control over national budgets, she argued, there could not be mutual liabilities that can turn into blank checks….”

Although Germany’s insistence on long-term integration has born fruit.

“The European Union gathering has goals for both the short and longer term — to ease the pressure on Spain and Italy, but also to lay the ground for increased integration of the euro zone.…
“The leaders will also discuss proposals for the future of the euro drafted by the heads of the major European institutions and released Tuesday, plans that could lead to the creation of a euro zone finance ministry and — eventually — greater sharing of debt burdens.”
An article that appeared several days ago in the Times anticipated these developments:

“Why Germany Will Pay Up to Save the Euro” 

“Yet it would be wrong to kiss the euro goodbye just yet. For all of Berlin’s neins, shooting down every serious proposal to address its woes, the German government knows it must ultimately cave and open its wallet to save the single currency…..

“But Ms. Merkel knows that Germany must ultimately underwrite the euro’s rescue, pretty much regardless of whether its conditions are satisfied. There are three good reasons. First, the euro has been very good to Germany. Second, the bailout costs are likely to be much lower than most Germans believe. Third, and perhaps most important, the cost to Germany of euro dismemberment would be incalculably high — far more than that of keeping the currency together…..

“Let’s take the reasons in turn…..

“Since the advent of the single currency, Germany’s labor costs have fallen more than 15 percent against the average labor costs of all the countries using the euro, and about 25 percent against those of the troubled nations on the periphery. If it dumped the euro for a new deutsche mark, its exchange rate would surge to make up for the difference, potentially crippling its exports, which have fed most of its economic growth over the last decade….”

The article points out why the financial burden on Germany will not be large, and then goes on to say:

“Rather than spending so much effort discussing the cost of bailing out Europe, Germany might do better by opening a public debate about the costs of letting the euro start to fall apart. Those are likely to be much less manageable….

“But given the stakes, it is hard not to conclude that Germany will ultimately pay whatever it takes. It’s not that difficult a call. On one hand, there are manageable costs and clear benefits. On the other, there is a decent chance of unmitigated disaster.”

Once again the European nations have decided to hang together rather than hang separately. Their efforts to save the Euro appear to bring them more rapidly together rather than drive them apart.

(To be fully informed visit

© 2012 Michael B. Lehmann

No comments: