Germany’s Government-Sponsored Export Machine Takes Aim At Greece, Argument Breaks Out

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When going overseas, Chancellor Merkel doesn’t leave home without planeloads full of executives from Germany’s most coddled companies – exports being the core of foreign policy. And if these deals get snagged on the rusty nails of payment risks, it’s up to the government to help out with guarantees, even if they’re infested with conflicts.

Confirmation of the latest such deal seeped out when Member of Parliament Eva Bulling-Schröter of the Left Party pestered the Economy Ministry about it. Indeed: the ministry said it had already issued the “fundamental commitments” for the construction of a lignite power plant near Ptolemaida in Northern Greece. These “commitments” were for export guarantees to cover the sale by German manufacturers of what will be one of the largest power plants in Greece – but that combination of coal-fired power plant and German government subsidy turned out to be toxic.

The system dates back to 1949 when the government, eager to get the war-torn economy back on its feet, put two private companies in charge of the taxpayer-funded program: the leading entity in the partnership is today’s Euler Hermes Deutschland AG – hence the German moniker “Hermes guarantee.” The other partner is PricewaterhouseCoopers AG. In 2012, newly issued Hermes guarantees amounted to €29.1 billion. Of that, 87.5% covered exports to developing countries. From the top down: Russia (€3.23 billion), China (€2.11 billion), Turkey (€2.10 billion), then Brazil, Bermuda, and so on. For the year, €282.5 million were paid out to cover credit losses, but due to the fee income, it was nevertheless the fourth year in a row of gains (€383.8 billion).

The main goal: securing jobs in Germany. For that purpose, an Ifo study estimated that the program was responsible “directly or indirectly” for 240,000 jobs in 2010: 70% at cherished behemoths, 22% at Mittelstand companies – privately held enterprises that have become powerhouses in their worldwide niche markets – and 8% at small companies. Philipp Rösler, Minister of Economics and Technology, called it “an ideal instrument for promoting foreign trade.”

There are some kinks, however. Government credit insurance protects domestic companies from credit risk that no private insurer wants to take on. This leads to distortions in the markets and imposes political influences on investment decisions. There is moral hazard: ignoring credit risk of foreign customers just to get a deal done, while the taxpayer is forced to take the risk – on the old corporate principle of privatizing gains and socializing losses. And worse, there is a risk of collusion between a near-bankrupt foreign partner and a domestic supplier in agreeing on a much higher price, that then will be paid, if push comes to shove, by taxpayers for the profit of both entities.

Subsidizing exports to secure jobs in Germany is something political parties on all sides can grudgingly agree on, even during an election year – unless the exports themselves are controversial. And often they are.

“Fukushima changed my mind about nuclear power,” said Chancellor Merkel after the nuclear disaster, as “even in a highly technologically developed country like Japan, the risk of nuclear energy cannot be mastered.” Hence her government’s sudden change of course in 2011 to abandon nuclear power by 2022, come hell or high water. And both are now on the way, with sky-high electricity prices, failed renewable energy boondoggles, bankrupt solar companies, an inadequate electricity grid….

But the German nuclear power industry didn’t throw in the towel. Instead, it did a little lobbying. In a paper leaked in August 2012, the Economy Ministry communicated its readiness to guarantee the export of nuclear power plants. It had already issued “Letters of Interest” for the examination of guarantee requests for nuclear power plants in India, The Czech Republic (40 miles from the German border, causing an outcry in neighboring Bavaria and elsewhere), the UK, and Finland. It was still working on those for Romania and China. With all the usual controversies, such as locations that were near faults or in earthquake-prone zones, or the notion that Germany would subsidize nuclear power in neighboring countries after having sworn to abandon it on its own territory due to the risks.

“When it comes to the export interests of the nuclear industry, the government pretends as if Fukushima had never happened,” said Heffa Schücking, CEO of Urgewald. In the same manner, the German non-profit, focused on the environment and human rights, has long demanded that the government cease providing subsidies, including credit guarantees, for the export of coal-fired power plants, without exception – unlike President Obama’s pledge to do that same, with some exceptions.

In one respect at least, Hermes guarantees seem appropriate for Greece: sinking deeper into its morass of debt, now 160.5% of GDP, despite years of austerity gyrations, it has been downgraded to “developing nation.”

But the government-subsidized sale of a large lignite powerplant to Greece comes as Germany is trying to be on the forefront of renewable energies – at tremendous cost to the taxpayer and the electricity consumer. It wants to cut carbon-dioxide emissions not only in Germany, but in all of Europe.

“If you want to protect the climate, you cannot build coal power plants – either in Germany or in Greece,” said Bulling-Schröter, the environmental policy guru of the Left coalition in Parliament. Instead, Germany should support the construction of renewable energy projects.

In response, the Economics Ministry defended itself as it always does: export of this power plant will secure “1,000 jobs” in Germany, 2,500 temporary construction jobs in Greece, and 250 permanent jobs to run the plant. It further pointed out that the new plant would replace some older, less efficient units, and so carbon-dioxide production would actually be reduced.

As with government subsidies for the export of nuclear power plants, or any other product that’s controversial in Germany, the storm will blow over, the guarantees will be issued, and the government-sponsored export machinery will grind into high gear to fill the order. The economy lives and dies by its exports, and Germany AG must be fed and coddled, no matter what the costs and issues might be for taxpayers.

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