Convincing the Germans to pay also for the unification of Eurozone

Discussion between Angela Merkel, German Federal Chancellor and José Manuel Barroso President of the European Commission, (in the foreground, from left to right). (EC Audiovisual Services).

Discussion between Angela Merkel, German Federal Chancellor and José Manuel Barroso President of the European Commission, (in the foreground, from left to right). (EC Audiovisual Services).

What Angela Merkel, the German Chancellor, said about the uncertainties that an eventual new hair-cut of the Greek state debt may trigger doesn’t exclude this possibility. She stressed that it may set off a “domino effect of uncertainty” and scare off possible investors. But the country has already performed a voluntary hair-cut on the privately held sovereign debt paper without triggering not even a ‘credit event’. Now that most of the Greek debt is held by fellow Eurozone governments and central banks, including the ECB, a hair-cut may appear as a ‘family’ affair and have no repercussions on private investors’ sentiment about this country.

In any case the German government, through the most competent lips of the Federal minister for Finance, Wolfgang Schäuble, has recognised that Athens will certainly need after 2014 a third aid package of soft loans, which understandably will be provided mainly by Berlin. Schäuble, in the good tradition of honesty in the German political life, didn’t want to let his fellow countrymen go to the polling stations on 22 September, without knowing that Germany has more obligations vis-a-vis the Eurozone.

Greece, like banks

Unfortunately for Germany, Greece is not the only dark spot in euro area. As everybody knows all Eurozone banks need a hell lot more new capital and a good trimming down. Not to forget that their ‘assets’ are not only larger than the triple of the euro area’s GDP but they still contain God knows what toxic placements, despite the fact that the ECB has helped them a lot to generously reduce their exposure to Greece, Spain, Italy, Portugal and Ireland.

As Greece, Ireland and Portugal depend on their euro area partners to avoid bankruptcy, Eurozone banks in order to survive in the long run they must find a harbour in the European Banking Union. Obviously very few Eurozone banks, if any, can find in the market enough new capital to cover their toxic assets. As a result they need time and also money from governments and the ECB to consolidate their balance sheets and trim down their size. In the meanwhile the prospect of some of them going bankrupt cannot be excluded. To this effect a strong bank resolution mechanism is urgently needed, if the euro area is to create at last the European Banking Union.

The banking union

European Sting writer Dennis Kefalakos on 12 July observed that “…the European Commission, having understood the problem, proposed the creation of a strong and centrally managed bank resolution authority. The relevant announcement went like that: “The European Commission has today (10/07/2013) proposed a Single Resolution Mechanism (SRM) for the Banking Union. The mechanism would complement the Single Supervisory Mechanism (SSM) which, once operational in late 2014, will see the European Central Bank (ECB) directly supervise banks in the euro area and in other Member States which decide to join the Banking Union. The Single Resolution Mechanism would ensure that – not withstanding stronger supervision – if a bank subject to the SSM faced serious difficulties, its resolution could be managed efficiently with minimal costs to taxpayers and the real economy”.

Despite the fact that the German lenders have a lot of problems themselves, including the ‘mighty’ Deutsche Bank, Berlin opposed strongly the above Commission proposal for a strong and centrally managed bank resolution authority. As in the case of Greece, however, Berlin is gradually watering down its opposition to a central resolution authority. Now Germany clearly agrees to offer Athens a third loan package. As for accepting the Commission’s proposal for a strong European Banking Union, the concession will also materialise soon.

Jörg Asmussen, a German banker and member of the Executive Board of the ECB, recently said that the European Banking Union is the most important development after the creation of the Eurozone and the introduction of euro. Of course everybody agrees with that and that’s why Germany at the end will accept not only to help Greece out of its misery but also to participate in a centrally managed European Banking Union.

Naturally Berlin would have preferred to pay only for the vices of its own banks and why not, let Greece rot in the south-east corner of the continent. But today this is impossible. If the Eurozone disintegrates disorderly it will create a new and worst global credit chaos and nobody wants that. On top of that in case of a, God forbid, new global credit crunch, Germany will pay not only a dear price but it will lose once and for all the seamless, almost internal, market it always dreamed of for its industrial products. China is a very good customer but it’s far away. At the end the German voters will be convinced that the Eurozone and the European Union, which offered them so much during the past 60 years and helped them absorb the reunification cost of their country, comes with a price.

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