The World from Berlin

'The Crisis Has Hit the Entire Core of the Euro Zone'

der Spiegel,

24 November, 2011

Those who believe the economic situation in the euro zone can only improve are, it seems, sadly mistaken. On the same day that conflict between Berlin and the European Commission over so-called euro bonds flared up, an auction of German ten-year bonds failed, with investors purchasing barely half of the €6 billion offering. Could Germany, supposedly the only safe haven in the euro zone, be the next country to slide into financial trouble?

The failure of the bond auction, dubbed a "complete disaster" by Marc Ostwald, an analyst at Monument Strategies, has shaken confidence in German debt. Bond investors are effectively on strike, lending to euro-zone banks is freezing up, ever more financial institutions are dependent on the ECB for funding, and depositors are withdrawing increasing amounts of money from southern European banks.

Though there has been much consternation over Germany's government bond auction failure, few officials are starting to panic just yet. German Finance Minister Wolfgang Schäuble's spokesman said the auction did not mean the government had refinancing problems, and the financial markets seemed to agree. Some analysts said Berlin just needed to offer a more attractive yield. But it was a sign that, as the paymaster of the euro zone, Germany may face creeping pressure as the crisis continues to deepen.

In one of the most widely quoted remarks of the day, Andrew Roberts, an analyst at the Royal Bank of Scotland, even went so far as to ask if Germany now realized that it was just "a first-class passenger on the Titanic."

France Pushing for ECB Intervention

France is now hoping the unfavorable outcome of the auction will increase pressure on Germany to allow the European Central Bank (ECB) to have a greater role in tackling the crisis. French President Nicolas Sarkozy is set to press German Chancellor Angela Merkel at a meeting in Strasbourg on Thursday which will also include Italian Prime Minister Mario Monti. "There is urgency (for ECB intervention)," French Foreign Minister Alain Juppe said on France Inter radio. "I think and hope that the thinking will evolve and that the ECB should play an essential role to re-establish confidence."

The president of the European Commission, meanwhile, has continued promoting the introduction of jointly issued euro bonds, which would essentially pool euro-zone debt. Coupled with stricter budgetary discipline, the bonds "could bring tremendous benefits," Jose Manuel Barroso said. But Merkel, a staunch opponent of such euro bonds, told lawmakers during an impassioned speech in Berlin on Wednesday that it was wrong to suggest that a "collectivization of the debt would allow us to overcome the currency union's structural flaws."

Instead, Berlin wants individual euro-zone countries to clean up their own finances so they can eventually borrow at lower rates again. Euro-bond proponents, on the other hand, argue that they would immediately ease refinancing costs for struggling countries. But for Germany, they would most likely lead to higher borrowing costs.

Merkel has thus repeated her call for changes to the EU treaty to guarantee strict enforcement of fiscal discipline. On that point, at least, Merkel and Barroso seem to agree. "It is quite clear, as things stand at present, if we want to keep a common currency, we need more integrated governance," Barroso said.

German commentators Thursday criticized both Barroso and Merkel:

The center-left Süddeutsche Zeitung writes:

"It is the duty of the European Commission to spur on the European Union with ideas. It needs courage occasionally, but wisdom always. Commission President Jose Manuel Borroso, however, is lacking the latter with his push for euro bonds."

"Instead of opening up the debate about the correct solution to the crisis, he has merely forced the government in Berlin to stiffen its tough stance even further. Barroso has not built a bridge, but slammed the door."

"Never in the history of the EU has a German head of government so publicly rebuked a president of the Commission like Angela Merkel has now done with Barroso. As the German chancellor is hardly known for hot-blooded spontaneity, the provocation must have been perceived as very great."

"And in fact, with his efforts, Barroso wanted to put Berlin under pressure to move away from its 'no' to euro bonds. One can argue whether the German position is correct. European Commissioner for Economic and Financial Affairs Olli Rehn admits nevertheless that there is no 'magic bullet' for solving the crisis. It is thus frivolous that the German concerns, which by the way are shared by others in the EU, to be swept aside just like that."

The left-leaning daily Die Tageszeitung writes:

"Carrots and sticks: That's how the proposals from the European Commission on how to resolve the debt crisis can be summed up. The carrots are common bonds with the same interest rates for all euro-zone countries -- so-called euro bonds. A responsibility community, therefore. The sticks are tighter controls and tougher punishments for those who exceed debt limits. This program, you would think, would enable Commission head Barroso to also score points in Berlin. Far from it."

"For Merkel, only discipline and obedience counts. The chancellor seems to be ignoring the fact that more and more economists are convinced that the crisis can only be overcome with both common bonds and support purchases through the ECB."

"With that, she is risking not only new conflict with Barroso, who has long been annoyed by the faltering German course, but she also risks isolating Germany even further. Already, Merkel can only rely on a handful of supporters in Paris, The Hague or Helsinki. French President Sarkozy has already distanced himself in the clash over the ECB. And now even Germany itself has become vulnerable: The federal budget for 2012 does not equate to the hard austerity course which Merkel preaches. On Wednesday, the markets also showed their first doubts about German creditworthiness and spurned formerly sought-after German bonds."

The left-leaning Berliner Zeitung writes:

"It is true: The highly-indebted euro-zone countries -- including Germany -- must reduce their debts. Therefore, the proposed legislation to tighten economic and budgetary control that the European Commission presented yesterday is right."

"It will also meet with the approval of the German government, whose strategy for tackling the crisis has for a long time primarily consisted of saving and controls. Even a cursory look at the economic and socio-political situation in the crisis countries (over 40 percent youth unemployment in Spain!) shows, however, that they need help. Alongside the demands there must be assistance. The EU Commission in Brussels is clear on that, unlike the German government."

"It therefore contrasts the strict budgetary control with the idea of common euro-zone bonds, which it calls 'stability bonds.' This would ease the burden on the crisis countries and give them some breathing space for urgently needed economic growth. In other words: It would prevent the countries from having to rescue themselves to death."

"Sooner or later Berlin will realize this too, because as an export nation the economic development of its neighbors is not insignificant to Germany."

The center-right Frankfurter Allgemeine Zeitung writes:

"The European Commission is undeniably acting in its own best interests as it presents new proposals for national budget policy. Its leaders are not only concerned about more fiscal discipline, but securing more authority. This becomes even more apparent as Commission President Jose Manuel Barroso links his proposals for budgetary control to a push for euro bonds. But even Barroso himself hasn't dared claim that the common bonds would definitely lead to more fiscal discipline. More than anything, they will secure the European authorities more clout, just as a deepened control of the budget would."

"More control by the Commission -- even at the cost of partial interference with national sovereignty -- is the natural alternative. Anyone who is suspicious, with good reason, of the noble motives of the Commission must suggest another way as to how budget discipline can be achieved without their participation."

Commentators also agreed that the failure of the German bond auction, whilst not a reason to panic, is proof that even Germany is not immune to the debt crisis:

The financial daily Handelsblatt writes:

"In a Germany that is has been accustomed to success in the era of the euro, there has never before been a showing so weak. That may not be any reason to view Germany's efforts to refinance its debt as being jeopardized. But the flop does show that the sex appeal of German government bonds as an extremely secure investment is waning. It is no longer the case that risk-averse investors are withdrawing their money from other euro-zone states and parking it, en masse, in German bonds as they were once inclined to do, even though they offered particularly low yields."

"The government provided an historically low interest rate of only 2 percent on Wednesday. Germany is thus financing itself extremely cheaply. If the government had offered a slightly higher interest coupon, it also would have had greater demand. Still, the absolute trust in German securities is no longer there. … This also shows that the crisis has now hit the entire core of the euro zone."

"In the short term, the ECB remains the only investor that can hold down the yields by purchasing bonds from euro-zone states. In the longer term, this will lead to a fiscal union that, at least in part, will be unable to avoid some form of euro bonds."

The conservative Die Welt writes:

"In at least one respect, the failed auction of German debt delivered a signal: Germany is not a safe harbor in the euro zone at any price. Major investors are not willing to put in their money for an interest rate of less than 2 percent over 10 years. The risks over such a long period of time are too big for them -- be it the fear of inflation, the danger of sinking credit ratings or the fear of default. Even Germany is not untouchable."

"Conversely, a botched sale of bonds does not automatically mean that the fundamental creditworthiness of the country must be questioned. Demand is still brisk for securities with shorter maturity periods, for example."

"Only events over the coming days will show how much more time the markets will give politicians to finally provide some answers. The clandestine hope of some politicians in Berlin to be able to inject some pre-Christmas calm into the bond market and perhaps have the opportunity by January to implement already-agreed strengthening of rescue measures must surely have at least been dented."

The Financial Times Deutschland writes:

"Despite assertions to the contrary, the crisis is often still seen as a Greek, Spanish and Italian problem instead of a collective challenge. But yesterday this asynchrony decreased a bit. The investors on the German sovereign bond market took care of this."

"Whatever the reason behind yesterday's warning signal was, it can only help the euro zone. It shows that Germany too could very quickly be pulled into a maelstrom of panic, and that Germany isn't invincible. This realization can end the ideological trench battle over euro bonds, or more intervention from the European Central bank, much more quickly than any bailout summit."