June 15, 2012 at 8:55 AM ET
BERLIN - For travel agent Holger Schneider, Europe’s financial crisis is finally hitting home.
Germans famously love to travel. But the deepening crisis on the continent -- and calls for greater German financial help from Greece and Spain -- has prompted many would-be vacationers to stay home and keep a tighter grip on their money.
“People give their money to the bank to save,” said Schneider. “But the banks give it to these weak countries and maybe the people will never get it back.”
So far, the recession that is sweeping across the rest of the continent has not arrived in Germany. That may help explain why opinion polls here show that Germans still oppose bailouts of Greece and Spain by roughly two to one.
“We are reading about the crisis in the newspapers and we’ve been hearing it in the media for years, but the average German has not experienced it,” said Frederich Heinemann, an economist at the Centre for European Economic Research. “We are not living in that crisis world.”
But as Greeks head to the polls Sunday in what has become a referendum on Germany’s insistence on painful reforms in return for continued aid to Athens, the mood has shifted. Now the crisis is seen to be encroaching on Germans' hard-won prosperity.
This week’s headlines have grown darker and the outlook more dire as the Greek “contagion” appears to be spreading. Despite a 100 billion euro ($125 billion) agreement to bail out Spanish banks, Moody's Investor Service slashed Spain's sovereign credit rating to just one level above junk bonds.
Central banks around the world are reportedly ready to flood the global economy with cash to calm the financial markets if Greek voters fail to elect a government willing to adhere to spending cuts and strict economic reforms.
'Crisis winner' so far
Beyond the headlines, the crisis hasn’t yet touched Germans' everyday lives. If anything, it has helped maintain the momentum of the German economy, the flywheel of the eurozone’s growth since the crisis began two years ago. Capital is flooding into Germany as investors and depositors in Greece and Spain seek shelter from interest rates at levels not seen in 60 years. Cheap money has sparked something of a construction boom in Germany. Dozens of cranes poke above the skyline in Berlin.
“The average German has been a crisis winner,” said Heinemann.
But Germany’s relatively robust economy, the result of a half decade of painful reforms initiated a decade ago, is now at risk. Heavily reliant on exports, Germany finds itself increasingly vulnerable to weakening in demand for its products as the global economy enters another downturn.
When asked about the current crisis, Germans frequently point to their own recent experience with economic stagnation and the painful solutions they adopted. In 2003, when the U.S. economy was beginning a recovery and unemployment stood at 5.8 percent, Germany’s economy was contracting and the jobless rate was heading for double digits. In response, then-Chancellor Gerhard Schröder initiated the so-called Agenda 2010 program that lifted restrictions on hiring and firing and pared back generous unemployment and retirement benefits.
The plan paid off.
After the global recession in 2007, German workers were largely spared the mass layoffs that sidelined millions of American workers and left the U.S. jobless rate stuck at painfully high levels. Today, as the rest of Europe slides into a deepening recession, Germans are living on an island of relative prosperity.
Economic reforms that worked for Germany before, however, can’t simply be cut-and-pasted onto its struggling neighbors. In Greece, for example, much of a widening budget deficit can be blamed on a tax system that would horrify a typically efficient German bureaucrat.
“In Germany we have a very intricate system of keeping books on the real estate market,” said Timo Klein, an economist with IHS Global based in Frankfurt. “Every property has the exact books going back decades and decades and with all kinds of information attached to that. This hardly exists in Greece -- which makes the real estate tax that is one of the austerity measures very hard to collect.”
Germans are quick with reminders of the generous aid they have already extended to their neighbors in need. Berlin has been far and away the biggest contributor to the roughly 700 billion euros ($883 billion) raised so far for the various funding mechanisms used to extend financial lifelines to its eurozone neighbors.
And political and popular support for continued German financial aid to the southern economies rests on the premise that the money transfers are an investment in future growth -- not a handout. Today, many Germans have serious doubts that investment will ever pay off.
“Greece has the sea and beaches and tourism and agriculture and maybe some specialized industries, but how can they come back without strong resources and production?” said Reinhard Schneil, a project coordinator at the Institute of Physics and Technology. “That’s what we're wondering: How can it work? You need Volkswagen and Mercedes, the chemical industries and so forth that are leaders in their markets to support an economy.”
Europe may be running out of time, in any case. Germany’s reforms took half a decade, but the financial markets are not that patient. Investors have driven up borrowing costs to unsustainable levels; yields on Spanish bonds this week topped 7 percent, a level widely seen as a financial point of no return in the current crisis. Capital has already fled Greece and Spain, leaving the banking systems at risk of collapse. No matter how well-designed and implemented, economies can't reform without a functioning banking system and a stable source of credit.
Borrow Germany's credit card?
Cheap credit was the root of the current crisis. When weaker southern economies joined the monetary union more than two decades ago, they gained access to lower interest rates on government borrowing. Much as a bank gives a subprime borrower a better rate when a prime borrower co-signs the loan, bond investors accepted lower rates because they believed the debts of weaker economies like Greece and Spain were now effectively backstopped by stronger economies like Germany and France.
Now, as Europe’s southern countries credit struggle to pay back investors, they are floating the idea of combining all eurozone borrowing with a single Eurobond. Greece and Spain are, in effect, asking to borrow Germany’s credit card. The answer, so far, has been a resounding “Nein!”
“Whatever Europe now is looking at for new solutions, one should not count on the Eurobond solutions,” said Heinemann. “It will not happen.”
This week, German Chancellor Angela Merkel, reflecting the mood of German voters, repeated her opposition to the Eurobond proposal.
With the departure of former French president Nicholas Sarkozy, whose alliance with Merkel in support of austerity recently helped lose him his job, Germany has become even more ambivalent about its role as Europe’s economic and monetary fire brigade. Germans are proud of their domestic economic accomplishments; with 2003 reforms still fresh in the mind, they’ll frequently remind visitors that they “did their homework.”
And memories of two world wars brought by Germany’s past ambitions to dominate the continent are strong. Though the current conflict may be fought with bonds instead of bombs, Germans are extremely reluctant to be seen as reviving imperial ambitions of the past.
German voters are also struggling -- after more than two decades -- with the thorny and often divisive issue of the massive domestic bailout that followed the reunification of East and West Germany after the fall of the Berlin wall. A so-called “solidarity tax” on West Germans, which is expected to be in place until 2019, has shifted more than two trillion euros from west to east. But it has left some western cities, including the capital, deeply in debt and has sparked calls for a realignment of the transfers.
The policy has also produced a kind of “bailout fatigue” among some Germans, who are weary of subsidizing the rebuilding of regions of their own country. It’s hard enough to send your hard-earned savings to help friends and relatives, let alone someone who doesn’t even speak your language
“It’s is much less acceptable to Germans in the European level because it has already produced all kinds problems at the national level, said Heinemann. “At the European level it would pose all sorts of unacceptable problems because it is unacceptable to the voters.”
Though talk has recently shifted to expanding infrastructure investment to revive growth, the eurozone, like the rest of the developed world, is already deeply in hock. In just the past five years, the average debt levels of OECD countries has risen from 70 percent of GDP to over 100 percent.
“Austerity is never fun, but when you max out your credit card, it becomes a reality, “ said David Rosenberg, chief economist at Gluskin Sheff.
German popular opinion still supports efforts to keep the common currency intact -- as long as the solutions involve spurring weaker economies to implement reforms that will revive growth. Their motive is more than altruistic.
Germany can’t go it alone -- and the German people know it. As its southern neighbors fall into recession, demand for German exports is also falling. If Spain and Greece exit the euro and launch new, much weaker currencies, Greek and Spanish consumers will see their spending power for German products plummet. The cost of a BMW or Mercedes, priced in those weaker local currencies, would skyrocket.
Germany also can't be the sole financial backstop for the rest of the continent. Even if it had unlimited financinal resources, popular support for bailing out Europe only goes so far.
“Maybe we are a leading economy in Europe but we are not the only one,”said Schneider, the travel agent. “We alone cannot stand up for all of Europe. If the next chain breaks down we won't have the money for all European countries. Maybe for one two or three .. but it should find an end."