Sunday, 27 May 2012

Eurozone Crisis: If Greece Goes, Germany's Prosperity Goes With It

THE OBSERVER: If the eurozone were to shrink, Germany's once-captive markets would become too poor to import: and the rapid appreciation of a stronger euro would make its exports much pricier

Germany last week found itself able to borrow for two years at the astonishingly low rate of 0.07%. Very nice too: but surely the real message Angela Merkel and her colleagues must take from the successful auction of those zero-coupon schatz bunds is that the single currency simply isn't working.

All the money wants to flow in one direction: towards Germany. It is only the efforts of the European Central Bank, as a giant recycler of liquidity to dry areas of the eurozone banking system, that is ensuring a stability of sorts. This position can't be sustained.

You would be hard-pressed to identify any shift in sentiment in Germany, however. Eurozone politicians had dinner in Brussels on Wednesday and most came away hungry. Mariano Rajoy in Spain is screaming that his country can't afford to keep paying 6% to borrow over 10 years. François Hollande in France and Mario Monti in Italy want to see the introduction of eurobonds, a system of joint issuance of debts. But their prayers have so far gone unanswered, because Germany is not persuaded, even after the rest of the world's most powerful leaders, led by Barack Obama, ganged up on Merkel at last weekend's G8 summit at Camp David.

Her reluctance is, of course, understandable. First, Germany's interest costs would rise, perhaps by €50bn a year, if eurozone members were to borrow collectively, instead of as individual countries. And in the event of one country suffering a crisis, stronger governments – for which read Germany – would be on the hook. » | The Observer | Sunday, May 27, 2012