The Long Memory of “The Sick Man of Europe”

It’s astounding just how distorted the coverage of Germany the grand Eurozone bailout scheme has been—well, at least in the English-speaking mainstream media. Time after time, we’re confronted with the inanest headlines and reports that place Chancellor Angela Merkel and her fellow politicians on some kind of invisible verge where they will suddenly, and under tremendous international pressure, come to their senses and … blink.

And by blinking, Germany would agree to, guarantee, and fund all the panaceas regularly trotted out by those that need them, particularly Spain, Italy, and now loudest of all, due to its shaky megabanks, France. The lasted blast came from the Wall Street Journal where Berlin Blinks on Shared Debt. Others regurgitated it, including MarketWatch. Yet, it contradicted everything that either German Finance Minister Wolfgang Schäuble or Chancellor Merkel had ever been quoted saying in the German press. And indeed, not much later, a spokesman at the Ministry of Finance made it clear, once again: “This is not true,” he said.

In addition to Eurobonds, the basket of panaceas includes other forms of “mutualization” of debt, a Eurozone-wide banking union with the power to bail out banks with taxpayer or ECB funds, a similarly endowed modified version of the still non-existing ESM bailout fund, and an ECB that can buy even the crappiest sovereign bonds of the most bankrupt Eurozone countries to keep them afloat another day (similar to the Fed and its purchases of treasuries and other securities).

But the 17-member Eurozone isn’t a country. It’s but a monetary union within a 27-member free-trade block. And any mutualization of debt would simply transfer financial responsibility from those who spend to those who end up having to pay for it, without any kind of reciprocal control. Even in the US, California can’t shuffle off its pile of debt and its never-ending deficits—though it’s supposed to have a balanced budget—to the Federal Government and its taxpayers. So why should Spain be able to shuffle off its debt to taxpayers in other countries?

That’s how it’s seen in Germany—where Eurobonds are despised by 79% of the people. The ESM, which continues to be pushed by Merkel, has been running the gauntlet ranging from street demonstrations to the Federal Constitutional Court, where it is currently hung up. It should have been ratified by July 1, and while it is likely to get through the process with some delay, any steps beyond it, such as Eurobonds, are considered unconstitutional.

But as if all these reasons still weren’t good enough, George Dorgan—a portfolio manager based in Switzerland—has put his finger on another powerful reason:

The first full-blown bailout Germany undertook, namely the integration of East Germany (only 17 million people), caused the German debt to nearly triple from €430 billion in 1989 to €1,200 billion in 1999, a decade during which even the US managed to reduce its debt for a couple of years. Germany greatly underestimated the integration costs. It led the country into a long phase of slow growth till 2006; and still now the west pays subsidies to the east. Spain, Italy, Portugal, Ireland, Cyprus, and Greece might be better developed than the former communist GDR. But they count over 100 million people and might need even more time to adjust than the 20 years the former Eastern Germans needed.

Merkel hails from former East Germany and experienced firsthand how difficult the adjustment has been for East Germans—and how expensive for West Germans. Reunification wasn’t only funded by debt that will be around for generations, but also by a special income tax, the Solidaritätszuschlag—lovingly called Soli—introduced in 1991. And it’s still around as well. As George points out, the entire period until 2006 was tough on Germany—by then “the sick man of Europe.” This is what it took to bail out a country of 17 million people, raise the standard of living, and make its industries competitive in a globalized economy.

Bailing out in this manner the growing stable of Eurozone countries will be beyond the feasible. As with East Germany, costs will be underestimated, but will then balloon for years or decades. Merkel knows that. Hence her limits on how far Germany would be willing to go.

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  3 comments for “The Long Memory of “The Sick Man of Europe”

  1. watchingthesuckinngmachine
    Jun 29, 2012 at 1:24 am

    Yes, thank youi for pointing out the vicious mendacious propaganda of the anglo media.
    This is war propaganda, there is no way around.

  2. fxfx
    Jun 29, 2012 at 12:41 pm

    The comparison to former East Germany is very flawed, though it still has some merits, in principle. The costs to "bail out" East Germany wre so high because before unification the – quite competetive – economy there got almost completely destroyed within a few months. Converting the deutschmark and the GDR-mark at 1:2-1:1 meant an overnight currency appreciation for East german producers of about 200-300 % while the barriers to competition from west german companies completely disappeared at the same time. East Germany had not needed such a "bail-out" if it hadn't been crushed economically by the ill-designed monetary unification. Apart from that, east germany over the decades paid ALL the war reparation costs of ENTIRE Germany towards the Soviet union – equivalent to some €400 billion that the West actually owed the East by the time of re-unification. That being said, Merkel wants to stay in power no matter what – so she will rather sacrifice German interests than risk an immediate collapse of Europe's financial system. case in point: her u-turn in the latest EU-summit. Currently, there is no significant political party in Germany that is demanding an end to the Euro-desaster. But it will come into existence quite soon and then internal political pressure will build up rapidly. My fear is, that by that time it will already be too late, as so many commitments will already have been made that the point of no return may long have been crossed.

  3. Dick Em!
    Jun 29, 2012 at 1:38 pm

    It will be interesting to find out how long the eUSSR can maintain its pledges for eurosocialist welfare and pensions schemes to its (trapped) citizenship…

    Those demographics arent going away anytime soon!

    German car workers paying for Italian hitmen in their dotage, must be the funniest irony of all…

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