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German report German report
by Euro Reporter
2011-06-21 08:05:51
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Germany provides loan guarantees to prop up Greece

Wolfgang Schauble, finance minister, said Germany was prepared to beef up the European Financial Stability Fund (EFSF) - one of the mechanisms set up last year as a temporary measure to bail-out stricken eurozone members. The move comes despite a growing backlash in Germany against the Greek rescue plans. Angela Merkel was criticised by leaders of her own coalition for "giving in" to France on the EU's approach to Greek bondholders. Horst Seehofer, head of the CSU, said that the decision to aim for voluntary agreements from bondholders to roll over their debts - rather than forcing them to - was too soft. Frank Schäffler, a rebel leader of the Free Democratic Party, junior coalition partner, told reporters: "What has been agreed is not a real participation of [private] creditors. It does not correspond to what the German Bundestag has agreed."

Klaus-Dieter Willsch, a backbencher in Ms Merkel's own party, the Christian Democratic Union, warned that it would be "difficult for her to win a majority" in the Bundestag for the second Greek bail-out. Germany had demanded bondholders be forced to share the costs of bailing out Greece, particularly the banks which bought billions of Euros of Greek debt. Last year's €110bn bail-out of Greece was highly unpopular in Germany.

But last week Ms Merkel was forced to abandon Germany's tough stance amid warnings that it was creating a dangerous blockage in the vital efforts to rescue Greece. European leaders lined up to warn that coercion would lead to a full-scale default - and unleash a "Lehman-like" shock on the global financial system. Jean-Claude Juncker, chairman of the group of eurozone finance ministers, said at the time: "It's a really ugly situation. The [German] idea is dangerous. It could provoke the gravest risk that all three rating agencies declare a credit event and then there are big contagion risks for other countries." The German Chancellor agreed to back France and the European Central Bank (ECB) and ask bondholders to "voluntarily" roll-over their debts, rather than force a restructuring. Nicholas Sarkozy called Germany's retreat "a major breakthrough". European markets, which had been rattled for days by the stand-off, also rallied on the news of the concession.


Why Germany must exit the euro

Imagine you’re in charge of Europe. Not, I grant you, the opportunity of a lifetime, but let’s narrow down the job description to one specific question. The only way you can save the single currency is to eject one country from the eurozone. So, who is it to be? You might be tempted this weekend to say Greece, for understandable reasons. Not only is it facing almost certain default, it has been a constant thorn in the side of the euro – spending too much, saving too little, and displaying the kind of corporate and statistical honesty you could only hope to match by placing Bernie Madoff in charge of FIFA.

But Greece is not the word. Stricken though it is, lancing that particular boil won’t help. Greece’s issues have always been a manifestation of a far deeper problem with the currency, one that policymakers still seem unable to confront. The eurozone has been pulling itself apart for years; removing Greece will not change that. However there is another eurozone member that sticks out like a sore thumb. It has run its economy just as, if not even more, recklessly than the Mediterranean brothers, has single-handedly destabilised the euro area for the best part of a decade and is one of the biggest road-blocks to its ultimate recovery. That country is Germany. This might sound counter-intuitive. Germany, after all, has an enormous current account surplus; it honed its productivity and competitiveness over the past decade; where Greece borrowed it saved, where Spain splurged it cut, where Ireland inflated it deflated. But that is precisely the problem. Were Keynes around today he would have identified the issue instantly: in any monetary system, nursing a mammoth current account surplus can be just as destabilising as a deficit.

It’s easy to blame Greece and its incontinent cousins for their over-spending – and certainly Athens is guilty of fiddling its fiscal figures and failing to collect taxes. But its twin deficits are also a consequence of the low interest rates which were largely determined by the way Germany ran its economy. The euro project was supposed to bring productivity across the Continent to similar levels. You would expect the same bang for your euro whether you were spending it in Athens or Berlin. A single currency area cannot hope to survive unless this law of economic gravity is obeyed –unless what it is really is a transfer union, where the rich constantly subsidise their poorer neighbours with infusions of cash. There is little prospect of a Greek productivity miracle in time for it to pay back its loans. In fact, the emergency loans being hammered out this weekend will only serve to exert more pressure on Greece to pay back debt rather than investing in its economy. And while the EU/IMF may well be able to afford a Greek bail-out, or for that matter an Irish and Portuguese bail-out, there is no way they can do the same for Spain – even if the German voters allowed it, which looks increasingly unlikely.

Greece would be better out of the eurozone than in – but then so would Portugal, Ireland, Spain and perhaps a few others. They would convert their old debt into the new drachma, escudo, punt etc, which would upset investors, since it amounts to a default. But it would at least free them from the debt deflation they would be consigned to under any euro bail-out. Their currencies will become representative of the uncompetitive economies they really are. But a series of exits would be incomparably messy: each new currency devaluation would have the potential to stir up a Lehman’s-style financial crisis of its own. Far better instead to get rid of the one real outlier. Without Germany, the euro would obviously be a significantly weaker currency (particularly if Germany was joined by the Netherlands). But it would no longer be torn apart by the unhealthy dynamics that have haunted it in its first decade. German policymakers should take a pragmatic look at the situation. On the one hand the only way to save the euro (without forcing out the Mediterraneans) is to make it a transfer union. They would have to absorb enormous long-term costs to support their weaker siblings – either in terms of inflation or simple cash transfers. It would be a slow-motion long-term bail-out of even greater scale than the recent emergency infusions. And even this does not rule out the short-term prospect of default. On the other hand, abandoning the euro would involve a nasty financial hit as German banks’ euro investments suddenly crater in real terms. The deutschemark 2.0 would appreciate, which would severely undermine the foundation of the 20th-century German economy – exports. The question is which of these would be more expensive. Both involve a default of sorts, though the deutschemark/dirty-euro version accomplishes that default through devaluation rather than a slow-cook bail-out.


Germany confirms human E. coli transmission

Health officials in Germany have confirmed that they have detected the first case of human-to-human spread of the deadly strain of the E. coli bacterium that has claimed the lives of almost 40 people. Authorities say a woman working in a kitchen of a catering company near Frankfurt, in the state of Hesse, became infected with the bacterium after eating sprouts and passed it on to 20 people she prepared food for.

"Now we have the proof that in this case a human passed on the germ to the vegetables and then it was passed to other humans," Daniel Bahr, Germany's health minister, said on Saturday, during a visit to the Institute of Hygiene of the University Hospital in Muenster. Cases began appearing at the start of May and the outbreak swelled to crisis level over the following three weeks, with the city of Hamburg at the epicentre.

On Saturday, Susanne Huggett, an infectious diseases expert at the Medilys laboratories at Hamburg's Asklepios Hospital, explained how the strain could be transmitted via food preparation. "If someone has the disease and prepares food for others - and we know that for this infection just a small amount of bacteria is enough - then that food can get contaminated by the sick person," she said.

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