Is Germany paying for southern Europe?

Germany is not paying for southern Europe. On the contrary, it benefits from it.

António Sérgio
6 July 2013

The following line is heard far too often not only in Germany but also across northern Europe: "The Germans will eventually be fed up with constantly paying for things”.

At the centre of contention is Germany’s 266 billion euros claim in the European TARGET2 system against Greece, Ireland and Portugal. Therefore, an important question arises: are the bailouts and current account deficits of Greece, Ireland and Portugal a real threat to German taxpayers? The German interpretation, whose main apologists are Hans-Werner Sinn and Thomas Mayer, is that TARGET2 claims represent a peripheral ‘secret bailout’ and a high risk to German taxpayers. The reason for this is that in the event that those countries decide to leave the euro, German taxpayers would incur the totality of the losses.

However, as has been pointed out by Karl Whelan and Paul De Grauwe, because TARGET2 transfers are made via the ECB, German claims are made to the ECB and not to the national banks of the countries who potentially exit the euro area. In other words, it is the ECB, not the Bundesbank, who has to claim the money back from the countries that leave the euro. Furthermore, in the same way that the annual profits of the European Central Bank (ECB) are distributed among member states according to their ECB national bank capital key, losses in the ECB are guided by the same rule.

Therefore, if Germany is ever to incur losses resulting from TARGET2, these losses would be calculated accordingly to Germany’s ECB capital key, which is 27%, and not, as Sinn and Mayer argue, to the totality of Germany’s TARGET2 credits. As a result, Germany would incur a 71 billion euros (0.4% of German GDP) loss and not the full 266 billion euros. Put differently, over 70% of German TARGET2 losses would be paid by the rest of the Eurozone member states. Article 33 of the protocol on the statute of the European System of Central Banks (ESCB) is clear regarding this matter: ‘In the event of a loss incurred by the ECB, the shortfall may be offset against the general reserve fund of the ECB and, if necessary, against the monetary income [capital key] of the relevant financial year in proportion and up to the amounts allocated to the national central banks’.

In addition, Germany has and is not experiencing low interest rates because of its "financial discipline" or because it didn't live above its means like the southerners did. One just has to look at EUROSTAT and see that since the Euro was introduced, there was not one single year in which Germany met the Maastricht criteria of debt below 60%. Even now, Germany's public debt is actually 80% GDP. Only the markets can explain why they classify Germany as safe and others as not when prior to the crisis Germany had higher public debts than for example, Portugal. In my opinion, this has to do with power politics, not economics.

The same applies, for instance, to the current record low interest rates in the UK, precisely at a time when it has the biggest public debt of its history. Is this economics? No it's not. That's power politics. Yet, in the case of Germany, "financial discipline" is often translated as “the German way”. How can 80% of public debt (20% higher than the convergence criteria) be considered “financial discipline”?

Finally, the European Financial Stability Facility has recently revealed that the countries under bailout programmes are paying close to 6.5% in interest rates to the Troika (EU, ECB, and IMF). As Germany can borrow at an historical 1% low (which according to the Kiel Institute has saved Germany 10 billion euros in 2012 alone and a total of a 100 billion since the beginning of the financial crisis) its participation on the Eurozone bailouts is not a burden to Germany. On the contrary, it is a lucrative business. After all, the bailouts are loans, not interest free or charitable hand-outs.

As in the case of TARGET2, the bailouts of Greece, Ireland and Portugal do involve a certain degree of risk, but it is very unlikely that they pose a real threat to German taxpayers. In fact, borrowing at 1% and charging 6.5% in interest I do not see where the idea that "The Germans will eventually be fed up with constantly paying for things" comes from. Germany is not paying for southern Europe. On the contrary, it benefits from it.

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