Germans groaned about bailing out Greece, but reluctantly agreed. They gritted their teeth over Ireland and Portugal, but ponied up.
Now that Europe’s debt crisis is threatening economic giants like Italy, Spain and, most recently, France, everyone is looking to Germany yet again, and one of the key questions is how much patience the German public has left for its less-disciplined neighbors.
Germany’s economy shows signs of slowing too, and Chancellor Angela Merkel is facing a backlash from critics in her own political coalition who are calling for her to put the brakes on further bailouts. The country’s answer may reshape the 17-nation community that uses the common euro currency. To many, it appears to be a choice between doubling down on its Eurozone bet, or thinking about folding.
“Who will be left to bail out us?” asked law firm office worker Esther Heerz, who lives in this middle-class Frankfurt suburb with her husband, Ralf, and son. The couple have so far supported the government’s bailout pledges. But Ralf’s recent brush with unemployment served as a reminder that Germany has to worry about its own citizens.
“People were angry about Greece, Ireland, and Portugal, but they are much more worried about Spain and Italy,” said Ferdinand Fichtner, chief economist at the Berlin-based German Institute for Economic Research. “This brings a completely new dimension to the problem. Greece was a question of principle, not money. Now it’s a question of survival.”
Options for stepping away include breaking the Eurozone in two, separating strong countries like Germany from the weak, like Greece and Italy; kicking troubled Southern European nations out entirely; or more dramatically, but less likely, abandoning the euro and reestablishing the German mark.
On the other hand, Germany could move in the opposite direction by heeding calls by some experts to triple or quadruple the current $625 billion bailout fund, of which Germany is the biggest guarantor; support the introduction of collective “eurobonds” to replace government bonds issued by individual countries; or push for even closer fiscal integration by creating a common finance ministry with sweeping powers to set taxes, limit debt and control deficits of Eurozone countries.
“So far German politicians have avoided a decision,” said Michael Sauge, economics editor for Der Spiegel magazine. “The government strategy has been to muddle through, try to win time and hope that things will settle down in Europe. But it isn’t working.”
Merkel is scheduled to meet Tuesday with French President Nicolas Sarkozy to coordinate a strategy for coping with the debt crisis, which hit French banking stocks hard this month amid investor rumors that France could be next to lose its AAA credit rating.
Some are urging Germany to use the worsening crisis as an opportunity to assert greater control over the Eurozone and bailout fund, demanding more leverage over the fiscal policies of those nations Germany is bailing out. But recalling the last century’s two World Wars, European neighbors get anxious when Germany seeks to extend its authority in the region.
Germans themselves, particularly the younger ones who do not feel stigmatized by the country’s Nazi past, may not agree that such steps are worth the price.
“Germans feel like they’ve been used as Europe’s piggy bank time and time again, and now they are saying ‘No more,’ ” said Europe analyst Peter Zeihan of the international analysis firm Stratfor.
After initially resisting a unified euro currency a decade ago, Germans have come to accept, even embrace, it.
In some ways, Germany has been one of the biggest winners in the Eurozone. In addition to boosting its political clout in the region, the common currency has ensured that Germany’s currency did not strengthen so much that it made the country’s exports too expensive. As a result, Germany has been one of the world’s economic stars since the 2008 recession.
“Let’s not kid ourselves: There is a massive benefit for Germany being in the euro,” said David Bloom, currency chief at HSBC in London. “If Germany were not in the euro, its manufacturing sector would have been crushed.”
Yet critics balked when the bailouts began last year. The tabloid newspaper Das Bild asked, “Will we finally have to pay for all of Europe?” One lawmaker suggested that Greece sell some of its islands to pay its debts.
Germans resented the fact that their retirement age was recently raised from 65 to 67, while many Greeks can quit in their mid-50s with government pensions. Ireland, another bailout recipient, boasts a higher per-capita income than Germany’s.
Such feelings are intensifying amid concern that growth is slowing in several sectors. Stock analysts have cut earnings estimates for several top German companies.
At the same time, the potential bailout costs are daunting. Italy’s cabinet approved an austerity plan Friday, but the nation’s debt is $1.7 trillion.
Burden of the bailouts
There’s no question that much of the bailout burden has fallen on Germany, which by some estimates is carrying about $233 billion of the guarantees made so far through its backing of the Luxembourg-based European Financial Stability Facility, the bailout fund created last year.
So far the pledges have not resulted in any losses. And as long as the recipients pay their debts, Germany shouldn’t suffer.
But economists say the burden is still having an effect. A planned middle-class tax cut is looking less likely, and consumer confidence is dropping. The cost of insuring German bonds against default is rising, chiefly because of investor concern about the nation’s liability to future bailouts.
Merkel’s government has resisted calls to triple the bailout fund or issue Europe-wide bonds, fearing a public backlash.
“If the German government agrees to a tripling of the safety umbrella, taxpayers would wake up,” said Hans-Peter Burghof, chair of University of Hohenheim’s banking and finance department. “It ruins our budget for many years, and we have done nothing to deserve that.”
For Merkel, bailouts are becoming an increasingly sensitive issue. Members of the Free Democrats, partners in the ruling coalition, openly questioned last month’s proposal to expand the powers of the bailout fund.
Frank Schaeffler, finance chair of the party, called it “monetary socialism” that leaves German taxpayers at risk.
“Membership in the Eurozone has been a political project that turned a blind eye to economic reality,” he said. “Now it’s payback time.”