Germany's Euro Fears

by John M. Curtis
(310) 204-8700

Copyright April 28, 2010
All Rights Reserved.                                

                Watching the European Union’s piggy bank crack, Chancellor Angela Merkel urged the EU to speed up the Greek bailout.  Greece’s well-publicized financial woes continue unwanted publicity for the euro-zone, whose currency has lost 20% of it value in the last month.  Piling up more debt causes concerns in world financial markets, dropping the over-inflated euro to more reasonable levels.  New revelations about economic weakness in Italy, Spain and Ireland also hasn’t helped matters, drawing more worries among currency traders.  Standard & Poors dropped Spain’s credit rating from AAA- to BBB+, causing 3% slide in European stocks.  Downgrading Spain increases pressure on the euro-zone to shore up financial reserves, increasing Spain’s borrowing costs with the Frankfurt-based European Central Bank.  Merkel wants quick action before more damage to the euro.

            Euro’s strong performance against foreign currencies, especially the U.S. dollar and Japanese yen, was based largely on less debt and more tightly controlled economies.  Euro-zone required debt to not exceed three percent of GDP, something that went badly out of whack in Greece at 15%.  Greece, Spain, Portugal, Italy and Ireland have had a hard time converting former currencies into inflated euros, largely based on the Deutsche mark and French franc.  Greece’s recent financial woes raised real concerns about the euro’s survival in southern Europe.  Southern European nations haven’t been able to manage the massive public employee pensions or socialized economies, providing lavish health, welfare and retirement benefits.  When Greece ran out of cash Nov. 2009, the euro-zone, especially Germany and France, showed little sympathy, blaming the Papandreou government.

            EU officials knew when they went to a common currency in 1999 the euro favored northern European currencies, especially Germany and France.  Converting to euros caused immediate distress in southern European countries with significantly smaller gross domestic products.  “It is quite clear that the negotiations between the Greek government, European Commission and International Monetary Fund must be accelerated,” said Merkel, worried that more delays could further damage the euro.  Germany and France have been dragging their feet, too busy pointing fingers and blaming Greece to deal with the financial consequences.  Now that the euro’s under pressure, causing problems Germany and France, Merkel insists they speed up the bailout.  Standard & Poors’ downgrade of Spain puts more pressure on the euro, presenting problems for the EU.

              President Barack Obama expressed concern that economic problems in Europe could spread across the Atlantic, dragging down an already fragile U.S. economic recovery.  “This is something that is of great concern to the president and we’re monitoring it very closely,” White House Spokesman Bill Burton told reporters on Air Force One.  Unlike the U.S. where states contribute to common treasury, euro-zone countries contribute less to the European Central Bank.  Germany, Europe’s strongest economy, worries about an unending stream of bailouts to less capitalized euro-zone states.  “The most important thing now is to stop, put out this bush fire in Greece before it spreads as a forest fired to the whole Euro-zone,” said European Economic Affairs Minister Olli Rehn.  Rehm’s wishful thinking doesn’t help the deficits piling up in Spain, Portugal, Italy and Ireland.

            Germany wants the International Monetary Fund to help the euro-zone deal with Greece’s insolvency.  Expecting to kick in around $130-160 billion over the next two years, the IMF faces a cash crunch for more needy third-world countries.  While the EU Central Bank boasts about the world’s most stable economy, it hasn’t ponied up the cash to rescue its member states.  Without an adequate tax-base for the EU Central Bank, it must rely, like the U.S. Federal Reserve Board, on printing more money and racking up more national debt.  Looking to the IMF defeats the purpose of having a European Central Bank.  Athen’s “bourse” stock exchange banned short-selling of bank stocks to prevent the same economic crisis seen in the U.S. in 2008, where otherwise solvent banks ran out of cash.  Depending on the European Central Bank puts Greece and other struggling economies at risk.

            Merkel’s conservative Christian Democrats face a real test May 9 with her mismanagement of the Greece crisis.  She equivocated too long throwing her support behind the Frankfurt-based European Central Bank bailing out Greece’s troubled economy.  Greece wouldn’t have its financial mess had the European Central Bank fairly compensated Greece for the clear differences between its economy and that of Germany and France.  Neither France nor Germany has been willing to share the wealth and pony up the cash needed to deal with Europe’s weaker economies.  Members of Merkel’s government, including German Finance Minister Wolfgang Schauble, have wanted to jettison Greece from the euro-zone, believing the kick-back island nation couldn’t pull its own weight.  Now that Greece’s problems are the tip of the iceberg, Merkel finally wants to cough up the cash.

John M. Curtis writes politically neutral commentary analyzing spin in national and global news. He's editor of OnlineColumnist.com and author of Dodging The Bullet and Operation Charisma.