In my view, there’s little chance the Germans are going to permit the EU to ride to the rescue of the Greeks. All from the bailout chatter doesn’t really think about the domestic political constraints in Germany.
Very first, a bit of quick background. Germany was traumatized by two world wars and an intervening period of irrelevance and hyperinflation. As a result, the German national psyche is extremely much geared toward preventing something resembling these outcomes in future. Very first and foremost, that has meant integration with the rest of Europe and a weak military so that you can prevent economic nationalism from becoming militaristic in Western Europe’s largest country. Second, this has meant an extreme aversion to high rates of inflation or something that could lead to inflation or currency revulsion.
As a result, the Germans entered into monetary union using the likes of Italy and Greece despite these nations perceived fiscal profligacy, higher inflation and weak currency policies. The thinking at the time was that the stability and growth pact (SGP) would reign in any excesses. However, when France and Germany both breached the magic 3% federal government deficit hurdle from the SGP during the Schroeder government, all bets were off; now Italy and Greece could deficit spend and point to core Europe’s biggest nations as an excuse – and this is exactly what has transpired.
Now, it has to be remembered the Euro was adopted in Germany without any democratic vote by the German electorate. It was imposed by fiat from the Federal government unlike in Denmark where the Euro was put to vote prior to the electorate and rejected. Actually, there was a lot of concern in Germany at the time the Germans would have rejected the Euro had it been voted upon – and this is the extremely cause a vote was not held.
Numerous ordinary Germans feel their great cash is now being trashed. They already had a currency union between Ostmark and Deutsche Mark, with Western Germans submitting to a “solidarity tax” in order to finance the upgrading of Eastern Germany’s infrastructure. So, to this day, many German look at larger Euro notes to determine if they were printed through the Germans, Italians, or Greeks – sometimes rejecting notes printed in countries viewed with suspicion like Italy.
With this as background, you should see the 2009 election of the CDU/CSU/FDP coalition as a signal that the German federal government is unlikely to submit to a bailout. Using the FDP replacing the SPD in government, the likelihood of a Greek bailout decreases. The FDP could be the libertarian junior partner in this new coalition (the same coalition which produced the SGP, through the way) and they are under enormous pressure from their constituents not to permit any bailouts. If Germany enables German tax dollars to go to the EU so that you can bailout the profligacy of Italy or Greece, there would be riots. Spain is another story – but Greece is known as fiscally profligate in Germany – so bailing them out is unacceptable politically. Let’s not forget that Germany has its own difficulties in banking as well.
That’s the politics from the issue in Germany. And I see this as essential now that Greece is the country under pressure in Europe instead of, say, Austria. This really is one because I have predicted the IMF would likely be used like a ‘bailout’ vehicle.
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