There has been much speculation over the last several weeks that the eurozone might break apart and that Germany might return to the D-Mark. The news media and many analysts feed this rumor, saying that Germany is tired of paying for Greece (and probably for the rest of Europe) and might decide to stray away from the pack.
These theories, while to some extent have some credence, fail to take into account the fact that the biggest beneficiary of the eurozone is Germany herself.
According to OECD figures, from Q1 2000 – Q32009, unit labor costs in Germany have risen 5 per cent, while the same figure for Greece is 35 per cent. This means that Germany's competitive position has remain intact, while the competitive position for Greece has deteriorated rapidly. This means that Germany has an advantage over other European partners when it comes to trade.
Germany's exports have in no way been deterred ever since the common currency was born. The main reason for this is that 2/3 of Germany's exports are within the eurozone. This basically means that, while the euro has indeed appreciated with most other world currencies, for Germany, due to the fact that it is so competitive, the euro has actually fallen in value. Germany haw the best of both worlds. They are part of a currency block whereby all partners have strong currency, but at the same time Germany has trade surpluses with everyone!
While Germany has always been a competitive economy, chances are that that its competitive position would have been compromised if it were not for the euro. Today the world economy and Germany itself, has China, India and a host of other third world countries to compete with. If it were not for the stable value of the euro, chances are that Germany's exports would be much less. As an example, with the euro, Germany is able to sell to Greece x amount of cars, but if Greece had the drachma, which would be worth at least 40 per cent less than what the euro is worth today, its a sure bet that Greece would buy much less cars from Germany.
So if Greece is not helped to overcome its problems, chances are that Greece will be forced to leave the euro and print drachmas. If this happens, then the euro is in trouble because Spain, Portugal and Italy might follow. If that happens, you can probably say goodbye to German trade surplussed.
As a result, it is in the national interest of Germany to keep the euro intact no matter what the cost. That's the reason why Angela Merkel always portrays the Greek stabilization plan as a euro issue and not a plan to save Greece.
However, the Greek stabilization plan is far from certain that it will work. On the one hand the fiscal adjustments required of Greece are very strict and on the other, even if everything goes according to plan, Greece will have a debt to GDP ratio of 140-150 per cent in 2014. The question is, if Greece has problems today, what makes everyone think that its problems will go away with 40 per cent more debt on its books? Also, if Greece cant get funding via market mechanisms today, why is the EU and IFM convinced that Greece will be able to return to the markets within 12-18 months from now?
One way to solve the problem in Greece is to apply a haircut to current bond holders so Greece will have less debt to service. Several weeks ago, Thomas Meyer, the chief economist of Deutsche Bank, said it very clear. He said that if the banks were to forgive 50 per cent of Greece's debt, then the problem would be solved. He also said that if this were to happen, Greece would be able to return to the markets in several months and would not need any help from Europe. Josef Ackermann, the CEO of Deutsche Bank also reiterated something along those lines several days later.
Many other German officials have also called the Greek bailout a waist of time and money. Greece, they say, can't pay this money anyway. German officials more than anyone else have said repeatedly that the bail out money is dead money. Why not restructure - haircut and stretching out maturities - and solve the problem today?
Karl Otto Pöhl, who was in charge of the German central bank also said the same thing in a recent interview in Spiegel magazine. Quoiting from Spiegel, Pöhl said, “Without a haircut, a partial debt waiver, it cannot and will not ever happen (meaning Greece will never be able to pay back the debt). So why not immediately? That would have been one alternative. The European Union should have declared half a year ago -- or even earlier -- that Greek debt needed restructuring”.
The question therefor is, why is Germany be so generous as to be ready to write off 50 per cent of Greek debt and jeopardize German banks?
The answer is that, it's much cheaper for Germany to write a check for 20-25 billion euros to the German banks to cover their losses and have the Greek problem solved, than to pay that money without any assurances that Greece will not default and undergo additional write-offs later on.
The bottom line is that Germany has a vested interest in keeping the euro intact. It's trade surpluses depend on everyone being in the euro. If the euro were to brake apart, Germany would have a big problem in today's competitive global environment. Subsidizing Greece by writing off a big part of its total debt is a small price to pay.
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