Photo: Wikimedia Commons
Whenever someone complains about German unwillingness to bail out the rest of Europe, and thus risk total disaster, someone invariably responds: But why should hardworking Germans bail out countries that borrowed too much and don’t work as much?On the surface, it does seem kind of immoral to burden German taxpayers in this way, but actually there’s a perfectly good answer.
Since its inception, the Eurozone has been a gigantic German subsidy machine.
This chart from the NYT shows it quite nicely: Since the common currency was formed, the German trade surplus surged. The trade deficit of everyone else widened.
The reason for this divergence is two-fold. First, German exports became more cost-competitive, due to the fact that the Euro has been cheaper than the Deutsche Mark would have been (and also Stronger than the Lira et. al. would have been). Second, the common currency allowed private citizens in the periphery to borrow at cheap rates like never before, snapping up German good. Remember this chart of Greek interest rates vs. Greek car sales?
So while Germany stands as a model of fiscal health, you must bear in mind that it’s been the debt of peripheral nations that has enabled Germany to stay under-leveraged.
Furthermore, the German state has been the recipient of a constant government subsidy due to the fact that it’s the home of safe-haven banking flows, meaning that money has flown out of peripheral banks into German banks, which then snap up German government bunds, which depresses their yields artificially.
This chart from CFR shows nicely the influx of deposits German banks have received in the last year, at the expense of peripheral banks.
The bottom line is that the Eurozone has been a tremendous gift to German exporters and the German state.
The idea that Germans are hard-working nobles, and the periphery is comprised of lazy borrowers fits nicely with cultural biases, but it doesn’t really reflect the dynamic of what’s happened over the last decade.
Germany continues to benefit massively from the Eurozone, as without it, it would be faced with swift loss of customers (all the countries around it), competitiveness problem (the Deutsche mark would likely surge in value) and removal of safe-haven banking flows. For this benefit, it’s not at all ridiculous that the Germans — through a combo of taxes and willingness to let the ECB print more money — help bail out everyone else.