IMAGENS DE OVOODOCORVO
Germany’s corona bond offer to Italy is … nothing
Political leaders in Berlin have been railing against
the idea of eurobonds for a long time, and vociferously.
By MATTHEW
KARNITSCHNIG AND HANS VON DER BURCHARD 4/8/20, 11:22 PM CET Updated 4/9/20,
5:13 AM CET
BERLIN —
“How about never — is never good for you?”
That
classic putdown captures the reality of Germany’s response to repeated pleas
from Mediterranean countries in recent days for the issuance of “corona bonds”
(joint debt backed by all eurozone countries) to help them battle the effects
of the pandemic.
And by the
sounds of it, never means never.
“Eurobonds are neither effective nor
justified,” Bavarian premier Markus Söder, the leader of the sister party of
Angela Merkel’s Christian Democrats, said on Wednesday in a video interview.
“One shouldn't forget that we — Germany — also have to take on new debt.
Eurobonds would lead to a dramatic deterioration of our own debt situation and
constrain our ability to act.”
In fact, in
the view of most economists, Germany has more than enough room to maneuver. Its
debt-to-GDP ratio, a key yardstick of a country’s financial health, fell below
60 percent last year. By comparison, in the U.S. the ratio was 107 percent and
in Italy 135 percent, near its all-time high. In other words, Berlin could
comfortably borrow vast sums to help the rest of Europe without endangering its
creditworthiness.
Fortunately
for the Germans, they’ve been able to let the Dutch play the bad cop in the
debt debate, a role the Netherlands has been more than happy to take on.
Even so,
few Germans see things that way, as their political leaders have been railing
against the idea of eurobonds for a long time, and vociferously. Nearly 65
percent of Germans are opposed to the idea, according to a poll published in
late March. Opposition is even stronger among German conservatives.
That’s why
Merkel and Olaf Scholz, Germany’s finance minister, haven’t budged on substance
in the corona bond debate, even as they’ve softened their rhetoric toward
Europe in recent days (“It’s in Germany’s interest that Europe emerge from this
test stronger,” Merkel said on Monday).
Fortunately for the Germans, they’ve been able to let
the Dutch play the bad cop in the debt debate, a role the Netherlands, which
has its own strong aversion to debt mutualization, has been more than happy to
take on.
Despite all
the noise about Dutch intransigence, Germany is the linchpin. If Berlin were to
decide to embrace the corona bond idea, it would be all but impossible for
smaller neighboring states such as the Netherlands or Austria to maintain their
opposition.
There’s
broad consensus from Vienna to Berlin to Helsinki that corona bonds are a
no-go. The northerners worry (with some justification) that once the taboo is
broken, eurobonds would be here to stay.
As southern
European countries struggle to cope with the crisis, the only real question is
what the Germans and their parsimonious allies are willing to do to help.
Going by
this week’s discussions among eurozone finance ministers in Brussels, the answer
would appear to be not much. The talks, which broke down in the small hours of
Wednesday, are set to resume on Thursday. Southern Europe shouldn't hold its
breath.
After
mounting an unprecedented €1 trillion rescue package for Germany, encompassing
direct cash injections, loan guarantees and assorted other emergency
assistance, Berlin has returned to its miserly ways vis-à-vis the rest of
Europe, even as it insists it’s being more generous than ever.
The
measures currently under discussion in Brussels for the entire eurozone — a
combination of credit lines from the European Stability Mechanism bailout fund,
unemployment assistance and reduced-rate corporate loans — equal less than half
of what Germany has prescribed for itself. The reason the deal on the table is
so attractive to Berlin is simple: it costs Germany relatively little (if no
one defaults). The ESM, for example, could rely on its existing lending
capacity to extend whatever credit countries apply for.
The risk
with Germany's promise-much-and-pay-little strategy is twofold. To begin,
Berlin’s resistance is likely to further fan both anti-German and anti-EU
sentiment in southern Europe. Italian right-wing populist leader Matteo Salvini
is already calling for his country to rethink its EU membership once the crisis
passes.
The more
immediate danger is that Berlin’s refusal to pony up now will end up costing
Germans more later. That’s what happened during the Greek crisis. At the outset
in 2010, Germany insisted on punishing terms that Greece could not
realistically meet. As a result, Greece’s rescue lasted longer and was vastly
more expensive than would have been the case if Germany had been more generous
at the outset.
Though the
harsh terms imposed on Greece went down well in Germany, where most people felt
the Greeks only had themselves to blame, the resentment in Greece over what
many perceived to be a diktat out of Berlin lingers to this day.
Throughout
the Greek crisis, Merkel and other German leaders insisted they were exhibiting
maximum solidarity. That same dynamic is at play now. The measures on the table
in Brussels represent a “thick rope” to pull Europe out of the crisis, Söder
said Monday.
In fact,
the sums currently under discussion are unlikely to be anywhere near enough.
Italy alone
will need financial assistance in the scale of €200-€250 billion to stay
afloat, said Gabriel Felbermayr, president of the Kiel Institute for the World
Economy. But the ESM loans under discussion in Brussels would only total €200
billion for all eurozone countries combined.
In order
for the fund to lend more, German and the other euro members would likely have
to increase the fund’s capital base, triggering another contentious debate in
Berlin. But waiting to do so until Italy and Spain’s economic position
deteriorates further is bound to increase the cost of rescuing them and could
even make doing so impossible. In contrast to Greece, one of Europe's smallest
economies, Italy and Spain are the bloc's third- and fourth-largest
respectively.
That's why
so much is at stake for Germany, a reality not lost on its political class.
"It's important to look at how intertwined our economies are and what
happens when the free flow of trade isn't guaranteed," Merkel said, adding
that Germany would only prosper if Europe prospered.
The problem
is that Germany's leaders, including Merkel, have done far too little over the
years to act on that maxim.
Proponents
of corona bonds, which would lower borrowing costs for many eurozone countries
because they would be guaranteed by all members, argue that they would give
capitals much more flexibility than the EU's existing mechanisms.
Felbermayr
has been one of the most senior German economists speaking out in favor of
corona bonds. He warned that lending the required billions instead via the ESM
and the European Investment Bank — the approach preferred by Berlin — would
likely result in Italian debt increasing from 135-160 percent of the country’s
economic output, which would make it more difficult for Rome to stem its debt
burden and build up resistance to future economic crises.
For
high-debt countries like Italy, the beauty of corona bonds is that they
wouldn’t land on the national books.
“A transfer
of debt risk via bonds would help to avoid a scenario where Italy remains stuck
in a debt crisis for many years to come,” Felbermayr said.
Given the
political realities in Germany, however, that fate will be difficult for Italy
to escape.
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