June 11, 2012 at 2:11 PM ET
BERLIN -- It’s a busy day on the Pariser Platz, except for the carriage drivers who ply their trade taking tourists for rides through Berlin's central park.
While throngs of out-of-towners are having their pictures taken in front of the Brandenberg Gate in the heart of Germany’s capital, business is slow for drivers like Janusz Michalak.
The tourists from Spain, Portugal and Greece, he said, haven’t got five euros to spare for a ride through the Tiergarten. But somehow, he said in disgust, the German government has money to bail out banks in Spain.
“It’s a black hole,” he said, as his horses stood in a line of carriages that weren’t moving. “Everyone is ready to help the big banks. For small people like me there is nothing. But it’s the people’s money.”
For the fourth time since the euro crisis began unwinding three years ago, Germany is playing the lead role and providing critical support for the latest -- and by the far the largest -- European bailout plan. This time, European finance officials have agreed to put up 100 billion euros ($125.1 billion) to backstop Spain’s banks after investors and depositors began fleeing several weeks ago and new sources of funding dried up.
As Europe’s largest -- and still growing -- economy, German support is essential for the latest in a three-year series of stopgap measures to stem the widening debt crisis and deepening recession.
But Germany seems on the verge of catching a bad case of bailout fatigue. Opinion polls are beginning to show waning support from voters and taxpayers for their reluctant role as the defender of the 20-year experiment in monetary union known as the euro. Now, as the common currency is producing increased pressure along multiple economic fault lines in the weaker southern economies, the German people are growing weary.
German newspapers reacted skeptically to the latest stopgap measure to help Spain. The mass-circulation Bild tabloid warned "the Spanish patient will also need more help than a one-off capital injection." The Mitteldeutsche Zeitung called it a costly "sedative" and highbrow Die Welt expressed similar doubts that the Spanish aid would stop the rot in the eurozone, despite a positive initial response in financial markets.
"Politicians are once again showing such great optimism that they are closer to solving the problems that the citizens, most of whom have already become skeptics, are even more suspicious," Die Welt wrote.
After two years of multiple rounds of haggling between Germany and Greece, austerity measures imposed by Berlin as a condition for aid brought down the Athens government that agreed to those terms. The looming Greek elections June 17 have heightened fears that Greek voters will again reject Germany’s terms and leave the monetary union. Opinion polls show voters deadlocked on the issue.
European financial officials and economists generally believe the effects of such a departure, though extremely painful for Greeks, could be manageable for the eurozone at large. But Spain’s banking system, which holds hundreds of billions of euros worth of debt issued by Madrid and other European governments, would create a financial shock an order of magnitude larger than the collapse of Greece.
The scope of the recent aid proposal for Spain, the fourth-largest economy in the 17-country eurozone, has heightened concerns voiced by rank-and-file Germans that the plan may be simply throwing good money after bad. There is no mechanism like the U.S.'s Federal Deposit Insurance Corporation's "resolution" powers, for example, to close down a bleeding bank to stem the losses. The risk is that the aid package simply keeps insolvent “zombie“ banks on indefinite and costly life support.
It’s also far from clear whether 100 million euros will be enough to stop the bleeding from the quiet "run" recently on Spanish banks. According to the latest data available, a record 66 billion euros fled Spanish banks for safer havens in May.
Spain’s banks are coping with two types of deteriorating assets. The first is a flood of mortgages that went bad in a U.S.-style housing bust that still hasn’t run its course.
Spain's banks are also on the hook for a large pile of Spanish government debt that is deteriorating in value daily as investors bail out of Spanish bonds. As their assets have dwindled, the banks, once a major source of funding for the Spanish government, have pulled back. That’s left the government with fewer buyers for its fresh debt.
Fitch Ratings cut long-term credit ratings for two of Spain's largest banks, Banco Santander and Banco Bilbao Vizcaya Argentaria, on Monday amid concerns that Spain's economy, which is in its third year of contraction, will remain in recession until 2013. The country's unemployment rate is 25 percent.
Though Spanish officials have taken pains to insist that the latest bailout is directed toward banks, and not the government itself, many economists say the financial crisis facing the two are inextricably intertwined.
That’s left the government and the country's lenders in a futile effort to prop each other up, Nobel Prize-winning economist Joseph Stiglitz told Reuters.
"The system ... is the Spanish government bails out Spanish banks, and Spanish banks bail out the Spanish government," Stiglitz said.
Initially, at least, stock markets rallied Monday on the announcement late Sunday that the bank bailout deal had been struck. But the euphoria was short-lived because it may have been less a sense of relief that the euro crisis has been averted than a belief that the coming large infusion of cash will spill over into stocks.
The longer-term impact of the deepening recession in southern Europe is already being felt on Germany’s heavily export-driven economy, which has seen a sharp slowdown in industrial production in the past few months as demand weakens from its trading partners, including China.
Now, as Germany’s unwelcome role as Europe’s crutch appears to be expanding once again, some economists here are questioning whether it has the financial resources to successfully “ring fence” weaker economies and continue to maintain its own prosperity.
"If we keep shifting the capital abroad, than there is less capital to invest at home," said Steffen Henzel, an economist with the IFO Institute in Munich.
Gemany’s reluctance to fund the continent's financial fire brigade is also deeply rooted in the flawed compact that created a common currency without the political infrastructure to enforce borrowing and spending discipline among its member states.
“Imagine if you were to expect from the U.S. to take over a guarantee of Mexican public debt,” said Friedrich Heinemann, an economist at the Centre for European Economic Research in Mannheim. “The U.S. would never do that. In a way, southern Europe expects some of this sort of help from Germany."
Though Merkel has recently led discussions setting forth a framework for that political union, it would take year to implement. Europe doesn’t have that much time.
The Frankfurter Allgemeine Zeitung worried aloud that Germany was getting soft on the kind of strict conditions imposed on Greece in exchange for financial aid. "Italy will also be happy to take money without tough conditions and Ireland may demand that its conditions be softened retroactively," it said.
Greece itself hinted Monday that it would like more lenient terms for its rescue plan. But Greece is not Spain; Spain's economic size alone gives it more leverage.
In the end, though, loss of popular support in Germany may not alter the outcome of the eurozone crisis, according to Roger Nightingale, economist at RDN Associates
“I don’t think it helps even if the Germans are behind it,' he said. “ I don’t think it helps if the Americans and the Chinese and the Japanese are behind it. They're tackling the wrong problem. The problem is not the Spanish banks. The problem is the weak economy.”