50 years ago ... on August 13, 1961, in the cover of night and in the space of five hours, the Berlin wall was built by East Germany’s communist regime. At the outset, the wall was a patchwork of available materials: concrete, bricks, even wood. But by the time the wall fell in 1989, it had become a formidable symbol of the divide between capitalism and communism.
The physical, and symbolic, barrier imposed by the wall weakened Germany. But today Germany has a whole new set of problems. Problems that started when the country bound its hands to the fiscally irresponsible countries of Europe in joining the eurozone. And those problems are rolling to a boil.
Things have been simmering since 2010 with the bailouts of Greece, Ireland and Portugal. And again recently, with the European Central Bank buying Spanish and Italian government bonds (to the tune of $32 billion in one week).
And things are really bubbling now with the European Commission announcing it may draft legislation for euro bonds, despite opposition from Germany. Add to that the fact that the country’s growth slowed to .1% in the second quarter.
German Chancellor Angela Merkel has been to the point with her opinion about the issuance of a euro bond: “No, that is not the right answer.” And Germany has good reason to oppose the idea. A euro bond would be a joint bond of the 17 countries of the eurozone, meaning the region would be collectively liable for its debt. Such a bond would be great for countries like Greece, Portugal, Italy, Ireland and Spain because it would lower their borrowing costs. But in doing that, it would increase Germany’s borrowing costs ... and it would basically mean that Germany (and other highly-rated nations like France and the Netherlands) would guarantee the debt of the spendthrift south.
And those increased costs are nothing to sniff at. According to Germany’s Ifo Institute, joint bond issuance would increase Germany’s interest payments by $67.6 billion per year.
But the fact that a euro bond would leave northern European taxpayers on the line for the liabilities of their debt-laden neighbors is just part of the problem.
The other part of the problem is that, on their own, euro bonds will do a fine job of addressing the symptoms and not the problem. Yes, it would lower borrowing costs for troubled countries, but higher borrowing costs are the symptom of too much spending and too much debt. And a euro bond doesn’t address anemic economic growth.
Germany has a lot at stake, and is being backed into a corner. And the market responded. The DAX (which tracks the performance of Germany’s top 30 blue-chip companies) has seen a much more pronounced sell-off than the Dow (which tracks 30 blue-chip companies in the U.S.).
That the Berlin wall was ever built was, in itself, an exclamation of defeat. Because if communism was such a great idea, you wouldn’t have to build barriers to keep people locked in the system.
And if issuing a bond that tied a currency bloc together in collective debt obligations was such a great idea, no one would have to convince Germany to go for it.
Border walls or euro bonds, the result is the same in the end - the can of reality is simply kicked down the road; and (according to Bloomberg) you can “buy time, but time is a commodity that, notoriously, runs out”.
Buying time is not a solution. The very idea of the eurozone presents a challenge in itself: 17 countries bound by a shared currency and monetary policy, but separated by often reckless fiscal policies and diverging economies. Pushing that problem off to another day by binding their hands together in debt is just another plan that will likely fail as soon as it is started.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.