German Politics and the Cyprus Bailout

Angela Merkel, courtesy of Armin Kübelbeck http://commons.wikimedia.org/wiki/File:Angela_Merkel_15.jpg

Angela Merkel, courtesy of Armin Kübelbeck http://commons.wikimedia.org/wiki/File:Angela_Merkel_15.jpg

Merkel’s Cyprus Gamble Explained as German Vote Nears – Bloomberg.

The German plan has been obvious for quite some time, and the Cyprus bailout gives more supporting evidence for it.

A euro breakup would be disastrous for Germany, the greatest beneficiary of the current Eurozone monetary system.  The single most accurate predictor of electoral success is a strong economy, which virtually assures the reelection of the incumbent; hence, Merkel must preserve the status quo.

This position should be supported by the German voters who also want a strong economy, but they do not see it this way.  Those who benefit from privilege are blind to it, and Germans do not believe that the euro has much to do with their economic success.  They would point to their superior system, which was not all that superior before the creation of the euro:

German Current Pre and Post Euro

Note the dramatic change in Germany’s current account following the introduction of the euro in 2002.

Since Germans believe that their prudent ways have led to their success, they very much resent the bailouts of the periphery.  In their minds, why should they give German money away to spendthrifts?

Explaining to German voters that they are the greatest beneficiaries of the euro is too nuanced an argument to make during a campaign, so another plan has arisen. Basically, as little German money to kick the can past elections is handed out but only in return for strict punishment.  As long as the bailout recipients are made to suffer for their money, the transfer payments are made palatable, and there is no electoral backlash.

This has been the strategy in Ireland, Greece and Spain, so no one should be surprised about Cyprus.  For the most part, no one was, and markets yawned.  The next time a country needs German money to stay afloat do not be surprised when more “one off” confiscations become part of the bailout.

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7 thoughts on “German Politics and the Cyprus Bailout

  1. Basically agree that Germany is the main beneficiary of the current system. But the current success relative to most other EU countries is not only based on the Euro, but also on the so called Hartz reforms, dramatically lowering social security costs, and the pressure on wage rises, which in real terms are below inflation.

    The political pressure in Germany to end the Euro system is of course partially fuelled by the belief that Germany will permanently finance the EU-internal deficits. Our own experience is that permanent subsidies do not solve any problems – coal subsidies failed to help the Ruhr region, actually Germany’s largest city if seen as one, to gain a new future, and the subsidies for the East have created beautifully renovated towns filled almost exclusively with pensioners (not all, but I know several such towns).

    But the other factor is that more and more Germans recognize that the Euro system destroys the South European economies, even if it helps Germany. Thus, the anti Euro sentiment comes from two sides,one egoistical and one altruistic. This is seen by many, if not the majority, of the voters, and they are now finding an outlet.

    One of the most well-known columnists of Spiegel Online, Wolfgang Münchau, has always supported the Euro and all measures to save it. But today he wrote that “there is a point where it is not any more morally justified to save a currency if Government and Parliament lack will and insight to manage it well. The day approaches when the Euro can only be defended with tanks. And then it is not anymore worthwhile to defend the Euro.” (my translation). The incredibly stupid brinkmanship of our top politicians has shocked me, too. The political tipping point is being reached quicker than expected.

    • Thanks for this valuable commentary. Is popular support building for a German exit from the Euro? There was a Wall Street Journal piece yesterday that some prominent German economists are forming a political party based on the platform of a German exit. To some of us here in the US, it looks like Germany will be stuck with an enormous bill in order to maintain the Euro; vary in excess of its (the Euro) long-term benefit.

      • Dave, one of our German readers believes that anti-euro backlash is developing and could affect the election. His name is Juergen, and I suggest you read his commentary on the site.

    • Rather a financial version of the brinkmanship that led to the First World War. Now a “Russian front” – where they are trying to get some of the bailout money – has opened up. That never did work out too well for Germany. Or Europe generally.

      • I do not see the parallels between the World Wars and the Eurocrisis in this context though I have pointed them out in others.

        The country is trying to spend as little money as possible to contain the crisis, and it will have a different reason for soaking the least politically protected group in each country as a bailout becomes necessary.

        Brinkmanship politics usually raise the likelihood of war, but I still do not believe that a war between European countries is in our future, just a lot of bad feelings. Keep in mind that all of the European powers participated in the brinkmanship with telegrams, letters and ultimatums swirling about the capitals for weeks.

    • Mr. Munchau also writes in English for the Financial Times, so I am familiar with his views. That is definitely an eye-popping statement coming from him. His articles that I have read are unabashedly pro-Euro.

    • You should google productivity and unit labor costs for Germany and some periphery country, eg Greece or Spain. I know what your media say to you, but you’ll see that increases in productivity have been modest (actually productivity gains in Greece eg were much higher, the problem is that ULC increased more because of the euro-boom) and don’t explain but a small portion of the change in your current account balance. It was 85% just the euro.

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