Why Germans have no choice but to bear brunt of rescue package
Published 06/08/2011 | 05:00
THERE are two key reasons why Germany cannot allow the euro to collapse and why German citizens may yet have to provide additional funding to a European rescue plan: exports and banks.
Germany is the second- largest exporting nation on earth, but despite growing trade links with China, the eurozone remains Germany's largest and most important export market. A major downturn in this market would spell disaster for many leading German firms.
But the biggest concern is not simply what might happen if there is a downturn in this market. The larger concern is what would happen if the eurozone itself broke up.
In that situation, countries would return to their national currencies. But for Germany this would pose a particular problem -- a new Deutschmark would rise in value against other currencies leaving German exporters at a critical disadvantage.
The bad news wouldn't end there. Germany's customers would also be paying for German goods with their punts or drachmas, leaving Germany facing huge risks every time its companies did business abroad. The benefit of the euro at present for Germany is that it only has to worry about currencies like the dollar and sterling, whereas when it trades in the eurozone it has no such risks. But leaving aside the implosion of the euro as a currency, the other problem is if the European banking system gets into even worse trouble. This would occur if the euro broke up and Greek, Spanish or even Irish banks literally collapsed. In that case, German banks would be on the hook for devastating losses.
For example, it is estimated German banks have an exposure to Greek banks of about €20bn, and this figure rises even more if you take into account the loans German banks have given the Greek government itself. German banks are believed to be owed €151bn by the Spanish government and Spanish banks, which is one of the largest exposures in Europe. A collapse of the Spanish banking system -- possible in the event of a euro break-up -- would also pose a major problem for Germany and its financial system.
But ultimately the biggest problem for German citizens is the direct funding they increasingly have to provide to countries like Ireland, Portugal and Greece. So far, German citizens are standing over loans worth €119.3bn in the rescue fund, but this is most certainly going to rise.
One analyst at a Japanese bank yesterday suggested the rescue fund for Europe -- known as the EFSF (European Financial Stability Facility) -- might need to triple in value, which would take it to about €1.3 trillion.
The biggest contributor to this would be Germany. German citizens are unlikely to welcome having to pay such a larger bill, but the dire consequences of a euro break-up mean they may have no choice.