Although Threatening to Withdraw from the Eurozone, the Chancellor Knows That the Collapse of the Euro is More Expensive Than Its Rescue

German Chancellor has smoothly rejected proposals for saving the euro by issuing common euro bonds and increasing the previously agreed rescue fund worth 440 billion euros. Borrowing under a common umbrella would be cheaper for over-indebted members, but more expensive for wealthier ones like Germany or France.

Written by: Vanja Figenwald
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A week after the second rescue in the eurozone, panic over its fate does not diminish, not because Europeans do not trust themselves, but because financial markets do not trust them, probably not without reason. Beloved banks have been rescued and protected, but the debt has been passed on to taxpayers, that is, to states that then repay it through various austerities and cuts to the same taxpayers. When you think about it a little more, that poor fool – the taxpayer – has paid for the banker twice. To make matters worse, it seems that even this ‘double taxation’ of fools is not enough, so 16 eurozone members are still in serious turmoil and searching for solutions that would allow, to complete the absurdity, over-indebted countries to borrow a little cheaper from those same bankers, more or less.

The biggest problem at the moment is Germany’s Iron Lady, Chancellor Angela Merkel, who has recently taken a central role in the beleaguered eurozone and decided that Germany will no longer open its purse and remain silent. The most powerful European economy and one of the most powerful in the world is increasingly unwilling to pay, according to the official version. Thus, Merkel decided to smoothly reject the two latest proposals for saving the euro as a currency: issuing common euro bonds and increasing the previously agreed rescue fund worth 440 billion euros. The logic in the first case dictates that by issuing a common bond, backed by all members, including those with solid finances, which actually boils down to Germany, they would lower the borrowing costs for struggling ‘peripheral’ economies like Portugal, Greece, Spain, Ireland, and perhaps later Belgium or the United Kingdom. This proposal by Luxembourg Prime Minister Jean-Claude Juncker and Italian Finance Minister Giulio Tremonti was rejected on the grounds that there is no legal justification for it (European treaties do not allow it). The duo envisioned in a text published in the Financial Times that the bonds would be issued by the European Debt Agency, which would inherit the current European Stability Fund, and that their limit would be borrowing up to 40 percent of the total GDP of the European Union.

ECB Cannot Patch the Holes
In the second case, the logic is even simpler: no more money is given, period. Thus, everything has been thrown onto the European Central Bank, recently an institution crucial for the stability of the euro, increasingly ‘mired’ in political squabbles, mostly thanks to its profit-driven head Jean-Claude Trichet. Namely, the strength of the monetary approach is limited, and it has become quite clear that eurozone members must develop a closer fiscal system, which many, despite everything, are unwilling to do, so Trichet has become one of the louder promoters of that idea. At the beginning of the month, the ECB bought record amounts of Portuguese and Irish debt – amounting to 100 million euros – which would reduce the borrowing costs for those countries and patch who knows which already damaged common currency. Germany’s commitment to rules and law hides, probably, a concrete fear that borrowing under a common umbrella might be cheaper for over-indebted members, but more expensive for wealthier ones like Germany or France.

Following statements by Klaus Regling, the man in charge of overseeing the Union’s special fund, that there is more than enough money for all future rescues, primarily for Portugal and Spain, Merkel firmly rejected demands for more money launched from the ECB. The total amount, when all guarantees and obligations are added, rises to 750 billion euros. Many are not worried about smaller economies like Portugal or Belgium, but rather Spain, for which much more money would be needed in the event of a rescue. The Chancellor’s torpedoing of the idea for a larger amount may therefore be premature, especially since it has often been shown that the Union underestimates the seriousness of the situation. The next problem is that the rules of the eurozone prevent the use of the full amount of 440 billion.

The Euro (After All) is Not in Question
It can be said that due to a kind of unrestrained uncertainty, further tremors have occurred in the eurozone and that they could have been avoided with a quicker, timely response. But that is pure speculation; the world will never know. One thing is certain: any disintegration of the eurozone would be incomparably more expensive than its rescue, and in that context, one should view the alleged statement of the firm Chancellor that she would withdraw Germany from the eurozone if new rules of discipline are not accepted, which is the crux of the problem with the euro. The reckless borrowing of many members, wholeheartedly supported by banks and private investors who today tremble, has reached its peak in recent years, but it is a bluff. It is precisely Germany that is most interested in saving the common currency, which has been very gentle on its economy, no matter what many claim. Furthermore, leaving the eurozone is a long and costly process that would ultimately be a Pyrrhic victory. Regaining monetary independence would be too expensive, which brings us to the other side of the coin, one of the important causes of the desire to save the euro: thus, banks are once again being rescued, deeply ‘mired’ in lending to problematic members. The total estimated exposure of banks to Portugal, Spain, Greece, Ireland, and Italy is 1.5 trillion euros, so it is quite clear that Germany, in any case, is not saving out of kindness and solidarity, but for itself and its stability, financially and then every other way. Saving the euro is good for the economy and for banks, no matter the cost, many experts claim, and, more importantly, decision-makers believe it.

The interest in saving the euro is not in question, but it is questionable what some members are willing to give up to make that happen. As it seems, giving money to quickly patch the holes is a more preferred solution for Germany than a common bond that would allow the Union much more benefits in the long term. On the other hand, Germany would like to strengthen fiscal cooperation in a different way, by punishing undisciplined members. The EU is still a mechanism of particular, narrow interests, but that could soon change.