January 18, 2012 / 3:23 PM / in 6 years

Analysis: Robust German economy won't mean largesse or diktat

BERLIN (Reuters) - While much of Europe suffers debt downgrades and job losses, Germany can boast of cheap borrowing, near record employment and a AAA credit rating that may even prove impervious to a mild recession.

But it has reason to avoid overt displays of enjoying others’ misfortune - Schadenfreude, as Germans would call it.

The steady drip of reassuring news for the economy did inspire a front-page cartoon on business daily Handelsblatt of Superman opening his shirt to reveal a German eagle, with the comment: “The gap between Germany and the rest of Europe is growing.”

But Germany knows that the downgrades inflicted on close euro zone partners like France and Austria, and on the bloc’s rescue fund, are likely to mean more demands on its generosity, and it may not relish the extra burden of responsibility.

With Italy’s Mario Monti now leading calls for Germany to boost the firepower of bailout funds and bring down borrowing costs of countries like his with tools such as common euro zone bonds, Chancellor Angela Merkel’s conservative government has made it abundantly clear that such suggestions are unwelcome.

Finance Minister Wolfgang Schaeuble said after S&P’s downgrade of the European Financial Stability Facility (EFSF) that its funding was “sufficient by far” for the job in hand, while Berlin remains unlikely to consider joint bonds.

Berlin’s priorities are to introduce the EFSF’s permanent successor, the European Stability Mechanism (ESM), a year ahead of schedule in mid-2012 and to get the whole European Union save Britain to sign up to a “fiscal compact” to avoid future crises.

This stubborn insistence on a step-by-step response to the crisis, and on resisting the “moral hazard” of thrifty German taxpayers giving repeated bailouts to reluctant reformers like Greece, often frustrates Merkel’s partners in Europe and Washington.

The downgrades will affect such dynamics. The weighting of AAA-rated countries in the euro zone has fallen from 61 percent to 36 percent, calculates Berenberg economist Holger Schmieding - meaning German influence grows and its joint leadership of the euro zone with France becomes more obviously asymmetrical.

But taking sole responsibility for leadership in a crisis that Merkel herself has described as the worst in Europe since World War Two does not look terribly attractive.

Ulrike Guerot, senior policy fellow at the European Council on Foreign Relations, describes the Franco-German tandem that had dictated the euro zone’s crisis response as Berlin riding a motorbike with Paris sitting in a sidecar.

But she believes Germany has no interest in diminishing its strategic partner just because of a downgrade by rating agencies whose authority Europe increasingly questions, and which markets appear to have taken in their stride.

“There is this very basic saying that nothing and nothing and nothing again is conceivable without France,” Guerot told Reuters. “Politically, if you break down the France-Germany axis, then Europe is finished.”


While Germany refrains from gloating about being the only one in the euro zone whose AAA rating is not at immediate risk -

others who kept S&P’s top rating are on “negative outlook” -there is a certain smug sense of being top of the class.

“Germany is more competitive than a decade ago and that is why there is more confidence in Germany and we are paying lower interest rates,” said Merkel’s chief whip in the Bundestag, Peter Altmaier.

The top-selling tabloid-style Bild newspaper pointed out the paradox that Germany’s status as a safe haven in the euro crisis means it is paying out less interest on its debt that at any time since 1993, while most business leaders believe exports are cheaper priced in euros than they would be in Deutsche marks.

“With sound fundamentals and positive side effects from the crisis, Germany is one of the few euro zone countries where the glass is currently rather half-full and not three-quarters empty,” said ING economist Carsten Brzeski.

This does not preclude occasional bursts of speculation that sharing a European currency is more trouble than it is worth and that Germany should cut its losses and get out, rather than continuing to bankroll European integration.

    But such talk is usually shouted down quickly, such as when the CEO of industrial gases firm Linde (LING.DE), Wolfgang Reitzle, mused that Germany should consider a euro exit.

    Firms like Siemens (SIEGn.DE), Daimler (DAIGn.DE), Deutsche Telekom (DTEGn.DE), BMW (BMWG.DE) and VW (VOWG_p.DE) rushed to the euro’s defense in a Reuters straw poll of German blue chips.

    “Whatever the euro bailouts cost, it will be less than the benefits that the euro has brought, and will bring, Germany and Europe,” Deutsche Post (DPWGn.DE) CEO Frank Appel told Reuters.

    But as Linde’s Reitzle points out, taxpayers have less patience with the bailouts than the CEOs and this is clearly reflected in the Bundestag, where senior Merkel MP Michael Meister has made it absolutely clear the conservative majority would not support Germany making up any post-downgrade shortfall in the EFSF.

    While the other half of the “Merkozy” partnership, Nicolas Sarkozy, may find his chances of re-election this spring damaged by the downgrade, Merkel’s chances of winning a second term in 2013 should be boosted by the economy’s surprising resilience.

    But the feeble health of her increasingly eurosceptic Free Democrat coalition allies, who have sunk as low as 2 percent in polls from 14.6 percent in the 2009 election, means Berlin must continue to stress the importance of discipline over solidarity with regard to struggling euro states like Italy and Greece.

    No matter how much the likes of Monti warn of a populist backlash if Germany does not help more, Merkel is a leader who will ultimately be more mindful of any threat from Europe to her coalition than vice versa. Until next year at least, the FDP will remain a “wild card” on euro policy that Merkel will have to take into account, one official said.

    Merkel can always rely on Germany’s europhile centre left to support bailout fund increases, as Greens leader Cem Oezdemir told foreign reporters this week: “We will support anything that helps to deepen and strengthen Europe.”

    But in a pre-election year, Merkel may be reluctant to lean heavily on the opposition Social Democrats and Greens in the Bundestag and risk further undermining the fragile FDP.

    “Not with this coalition,” was the response of another top official, when asked if Germany could consider paying in more.

    Additional reporting by Gernot Heller, Andreas Rinke, Annika Breidthardt, Noah Barkin and Frankfurt bureau; Writing by Stephen Brown; Editing by Ruth Pitchford

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