The Eurozone Becomes The German Zone

Includes: EWG, FXE
by: Robert Brusca

While Germany all but flagellates the Greeks, Germany continues to run its own moderately contractive, "Germanically responsible" policy and refuses the role of engine of growth for Europe. In their time of need, Germany has put its foot down to adding more financial wherewithal to zone-wide institutions that are in dire need of help. Instead, Germany is demanding greater sacrifice from a country entering its fifth year of recession.

How ironic that Germany, the country that in WWII pillaged gold reserves from Greece and never repaid it, could treat the Greeks so badly. The Germans have managed to create a Post WWII environment in which they are now oh-so careful. Apparently it's okay to pretend that Germany never robbed Greece of its gold, a fact that has helped to leave Greece in the state it is in today.

We could add that Germany's participation in a Greek bailout is really bailing out German banks that over-lent to Greece and elsewhere in Europe. And that Germany itself sold unneeded military equipment (refurbished submarines!) whose transactions were rammed though for payment even as Greece was falling apart, just adding to the Greek pickle of too much debt. Of all countries, Germany, after its experience with WWI reparations, should understand the consequences of heaping a load of responsibilities on the back of a people that cannot carry the burden. Who has the greatest moral hazard in the Greek German relationship? I'll leave that for the reader to decide.

And now Germany, among other EMU nations, will ride the wave of demand in the US to carry its economy to a higher tide of growth while adding nothing to world demand and red-lining the needy in its own Zone, the conditions of which are badly neglected. Throughout the Zone's infancy, Germany was only really interested in the exchange rate mechanism and the ECB, not in its fellow members or in what would make the whole of the Zone work. They just wanted it to work for Germany. And it does, but it works for few others.

This a little bit like a bad parent taking no blame for how its child turned out. Germany and other EMU countries were worried about the admission to the Zone of the Southern European (Mediterranean) countries from the start. and Southern Europe's admission was the reason for the Maastricht agreement that in in the mid-1990s was instead triggered by German and French violations. Germany and France, who instead of acceding to the demands of that rule, promptly pulled its teeth.

Inflation in Southern Europe has always always run at a higher pace than elsewhere, and never was there a word of rebuke. So much for all being in the Zone together, and for euro solidarity. Apart from a single zone-wide passport that allows euro citizens to avoid the lines at airports, there is no European citizen.

When problems deepened in the Zone, Germany's solution was not to stand up and face it like a Zone, not to look for an EMU-wide solution, but to resort to the 'Bento box' view of the Zone where countries are viewed as tethered together by a single currency but other than that are confined to their own little space and expected to run their own fiscal policy which is apparently henceforth to be set up on a German model to restrict the possibility of ongoing deficits that might inconvenience Germany some day in the future. Needless to say, having the rats all scurry back to their rat-holes has done nothing to mollify the banking system that is rife with cross border claims. It is here that we uncover the real reason to keep the Zone together: because of the banks. If they fail there is a real problem. And there are too many cross-border claims to care for.

The beleaguered countries of the South are being bailed out, which is to say the debts owed to the banks of the north are going to get some backing, but there is no development fund or agency or any development money of any sort to help the South pull off this amazing development feat. The Zone increasingly is coming to look like Germany. It is protecting German interests not advancing the standard of living anywhere else and not trying to bridge the Zone's myriad cultural conflicts. The new Zone motto is: We're all German after all.

The US trade report for December shows that the US is back to growth and instead of everyone learning their lesson from having too much money race into the US (that evil, over-consuming, under-saving country), it is going to happen again. There is too little demand elsewhere, so the US will fill the bill.No one is interested in making the surplus countries like Germany "reform" by having to grow faster. No.

In this world we are hardly better off than having currencies tethered to gold. It's a question of what is going to hold back growth. Right now, instead of gold, the constraint is Germany - certainly true if you are in EMU. If Germany's slow speed does not hold you back, it will build an excess like an unstable vial of nitroglycerin. Or maybe it will be China's pegging its currency too low to accumulate massive foreign exchange reserves to threaten you with later, at its discretion? Go for export-led growth; do not cultivate your own. This was the message that helped to get us into our financial fix, and we are spreading it again. In EMU and in the world economy it is Germany that is refusing to pick up its speed, and instead it is running such a carefully controlled domestic growth environment that it can make progress, but at the expense of everyone around it.

Apparently there were next to no lessons learned in our last financial crisis. We do not see Germany stepping up to help Greece. We can understand many reasons for this. And while the Greeks are hardly the poster children for the aggrieved parties of the world, their plight is a plight brought on by euro-mismanagement. Who had more of hand in setting up and enforcing that management than Germany? Doesn't Germany feel any guilt or shame? It should. Anger from them just does not cut it.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.