By Terry Connelly, dean emeritus of the Ageno School of Business at Golden Gate University
Day after day in the financial news, we see stories of how the leadership of Germany seems to be the one implacable force standing in the way of quick action to resolve the euro financial crisis, which is now running well into its third year. We know that overall Eurozone GDP turned negative (.2%) during the second quarter of this year and is expected to confirm recession with another negative result for the current quarter. Yet forces from Germany continue to resist aggressive economic stimulus by the European Central Bank and any steps toward the purchasing of troubled sovereign debt by the ECB to counteract speculative bets driving up the debt burdens of already troubled southern tier Eurozone nations.
We also have seen recent polling indicating that only a quarter of the German populace believes that Greece will remain in the Eurozone and should get any more assistance to prop up its economy while it struggles with an overwhelming debt burden and a deep recession simultaneously. No doubt these polls show why German politicians insist that there will be no more money advanced to Greece even under currently agreed bailout terms unless the Greeks absolutely toe the line in reducing spending, cut wages and pensions and sell public assets even at the expense of further deterioration of their economic base.
The Greeks are trying to negotiate some "breathing room" by way of delayed enforcement of these austerity measures to allow for some measure of the economic growth needed to actually fund their debt repayment. But Germany continues, in somewhat self-contradictory fashion, to hold the Greek economy's head underwater while expecting it to breathe! Germany appears determined to force Greece to feel what it's like to be drowning in its own debt, so that the Greeks will never forget that near-death experience and never again resort to borrowing more than they can afford to live the good life, high on the dole.
Germany Is Far From Innocent
Germans themselves have been driven to a high degree of economic and fiscal discipline by their own long memory of the massive inflation during the Weimer Republic 80 years ago that led to the rise of Hitler and the Nazis and nearly destroyed their nation. In so doing, they have become by far the leading economy in the Eurozone. But along with that performance record, they have also become the principal funder of economic bailouts of troubled Eurozone economies that they feel have been profligate spenders.
Germans resent this burden understandably, but tend to duck the truth that they brought it on themselves. Germany was more than happy to enjoy the fruits of exports to the poorer southern tier Eurozone countries that exploded with the introduction of the common euro currency that they could borrow from German banks much more cheaply than they could have with their former drachmas and lira. German authorities knew full well that Greece and others were using accounting tricks to mask the real level of public debt during the early 2000s while German exports were taking off. Indeed, Germany itself was the first along with France to break the Eurozone's own official limit on sovereign debt as a percentage of GDP, knowing that there was no enforcement mechanism. They gave themselves a pass and looked the other way when other countries took things a step further because of the big profits German exporters and bankers were making off the situation.
Will the German Approach Translate?
Now the Germans are all about "enforcement mechanisms" when the predictable consequences of their complicity in Greek, Italian and Spanish excesses (not to mention their own) have come to pass and put the squeeze on their own economic expansion. And yet, is their remedy of strict austerity for the Southern tier countries really doing the Germans any good? Does "fighting the last war" after "the horse is out of the barn" actually work? The evidence suggest the answer is "no." The latest report on the German economy published in the September 3rd Financial Times of London shows that German exports declined in August at the fastest rate since April 2009, which is roughly when the Greek sovereign debt crisis first exploded.
Why then do the Germans double down on waterboarding the Greek economy -- even promising the same for Italy and Spain if they, too, don't adhere to the German prescription of austerity -- even as it hurts their own economy? Perhaps it gives them a sense of control of a situation that is really quite out of their control.
A Global Problem
The fate of the Eurozone economy is now basically in the hands of the global financial markets that will pass judgment on the credibility and effectiveness of measures taken by the ECB and other authorities (or not taken, as the Germans seems to prefer) to save the euro. The guess here is that some of Germany's own financial institutions are secretly hoping the rest of Europe can successfully resist the pressure from their economic landlord and allow the ECB to become a bit more like the U.S. Federal Reserve as a true lender of last resort. The Fed has its critics, but it must be said that the global financial markets are hardly worried about the collapse of the U.S. currency following the Fed's intervention, while the euro is clearly in the "last resort" time zone.
Maybe it also makes the Germans feel good about themselves to impose their own brand of economic discipline on another nation while their own economy sinks. As a nation, Germany seems to be in a state of denial about the probable effects of a collapse of the euro on its own export-driven economy, and successfully torturing another economy into submission creates a temporary illusion of financial potency.
All this is not to deny that the Greeks were not profligate in the extreme; analytically, they deserve their harsh and painful medicine. But we have seen the effects of "destroying this village in order to save it." The French, who have generally had a more tolerant view of man's foibles over the years than the Germans, have taken the lead in arguing for a dose of growth hormones along with the castor oil of austerity in Eurozone policy.
Next week we will learn whether Germany's highest court will invalidate Germany's participation in even the modest collective sovereign debt rescue fund the Eurozone has managed to cobble together. We don't know whether the German justices, like their U.S. counterparts, secretly follow the election returns, but Germans with a view to their own economic well being may hope they are quietly perusing the Financial Times.
Terry Connelly is an economic expert and dean emeritus of the Ageno School of Business at Golden Gate University in San Francisco. Terry holds a law degree from NYU School of Law and his professional history includes positions with Ernst & Young Australia, the Queensland University of Technology Graduate School of Business, New York law firm Cravath, Swaine & Moore, global chief of staff at Salomon Brothers investment banking firm and global head of investment banking at Cowen & Company. In conjunction with Golden Gate University President Dan Angel, Terry co-authored Riptide: The New Normal In Higher Education.