Debt Crisis Myth: Why Germany Isn’t Benefiting from Euro’s Woes

Published on Spiegel Online International, by Sven Böll, February 7, 2012.

There is a widespread belief that Germany is the big winner of the euro crisis, as investors stash their money in the euro zone’s last safe haven, driving interest rates on German bonds down to record lows. But the idea is just a myth. Indeed, the crisis could end up costing Berlin dearly … //  

… ‘Germany Is a Clear Loser’:

This supposedly logical argument is currently widespread throughout Europe. But there is just one problem: It’s a myth. Any examination of how the euro crisis affects German government finances quickly reveals that the costs far outweigh the benefits. “Others might be more hard-hit, but Germany is a clear loser in the debt crisis,” says Clemens Fuest, an Oxford University-based economist who will be the future head of the Center for European Economic Research (ZEW).

There are two main reasons for this. First, no other country has taken on such substantial obligations as Germany to stabilize the common currency. Second, the financial benefits resulting from the crisis are smaller than some believe.

The German Finance Ministry feels that the IW’s figures are questionable. The IW projections, say officials in Berlin, are based on an analysis of the current situation. But reliable estimates about the long-term effects of interest rates cannot be derived from such figures, they point out, adding that it is only possible to calculate credible data about the benefits enjoyed to date. On that basis, the cumulative financial benefit since 2009 amounts to only a few billion euros.

This profit is offset by foreseeable losses and potential risks. The countries in the monetary union have already lent insolvent Greece more than €50 billion, with the largest share — €15 billion — of these bilateral loans coming from Germany. Only the most inveterate optimists still believe that Germany will ever be paid back in full.

Risk of Billions in Losses:
Greece is so hopelessly indebted that the haircut by private-sector investors will not save the country. There is a growing realization that donor countries will also have to participate in the debt relief sooner or later. In the event of a 50-percent haircut, the German Finance Ministry would chalk up close to €8 billion in losses, which would more than eat up the interest-related gains of recent years.

And this would not even be the full extent of losses. The European Central Bank (ECB) is also under substantial pressure to write off a portion of Athens’ debts. If this happens, Germany, as one of the principal owners of the ECB, would end up having to offset the resulting deficits. In the worst case, those costs could also run into the billions.

Greece represents the most obvious risk to the German federal budget, but not the only one. There is also the temporary euro backstop fund, the European Financial Stability Facility (EFSF). Germany also guarantees €211 billion of the more than €700 billion in the EFSF.

Portugal alone is receiving close to €30 billion directly from the bailout fund. And in recent days, the country has found itself in the markets’ crosshairs more than ever. Many economists feel that a restructuring of Portugal’s debt is inevitable. That, too, could lead to further losses for Schäuble.

Expected to Pony Up: … (full text).

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