German Chancellor Angela Merkel has spent the past two years trying to convince financial markets that the single currency is good for Europe and is here to stay.
Stock-price gains and falling bond yields in 2012 would suggest she has succeeded, at least temporarily, in doing that. Now she just needs to do a better job of convincing her fellow Germans.
Merkel may have managed to secure parliamentary approval for Greece’s second bailout of 130 billion euros ($170 billion) last month, but she hasn’t done enough to educate the electorate on the benefits that the euro has brought to Europe’s biggest economy over the past decade. As Angela Cullen reports in the April issue of Bloomberg Markets magazine, repeated bailouts for the euro area’s indebted countries have left Germany’s taxpayers bewildered at the prospect of having to subsidize their less-fortunate neighbors on a permanent basis. This wouldn’t be the case if the country of 82 million people got behind Merkel’s drive for “more Europe, not less Europe.”
Corporations have been the euro’s primary defenders in Germany. It’s easy to see why: Total exports exceeded 1 trillion euros for the first time last year, thanks in large part to a currency that is much cheaper than an independent deutsche mark would be. As Chief Financial Officer Joerg Schneider of Munich Re, the world’s largest reinsurer, has said, “We haven’t pointed out enough that the euro is a massive export-support instrument for Germany.” Clearly that message hasn’t found much traction with an electorate that still yearns for the old currency: Every second German wants the deutsche mark back, according to a survey conducted in September by Focus magazine.
Statistics show the benefits reaped by Germans under the euro. Exports have more than doubled in the past decade compared with an increase of about 68 percent in the 10 years before the euro’s introduction in 1999. With the help of labor reforms under former Chancellor Gerhard Schroeder, unemployment is now 6.8 percent compared with more than 10 percent when Germany gave up the deutsche mark. Even though the fiscal burden may increase to pay for bailouts, the top rate of tax paid by most Germans on their personal income has dropped by more than 10 percentage points under the euro. Bottom line: more money for Germans.
The nation’s taxpayers should note that abandoning the euro may cost them more than staying in and providing bailout money. If Germany left the euro, the cost would be as much as 8,000 euros for every German adult and child in the first year and about 4,500 euros a person every year after that, UBS AG economists said last year. By contrast, the cost of bailing out Greece, Ireland and Portugal entirely would be about 1,000 euros per German -- in one single hit -- if those countries defaulted, bondholders took a 50 percent “haircut” and the euro area purchased all outstanding debt of the three nations.
Chancellor Merkel must appeal to Germans’ pocketbooks to garner the support she needs to rescue the euro. She also has to win over renegade elements within her Christian Democratic Union party, and heal the rift that has emerged with her Free Democrat coalition partners, to move the process forward. Her failure to secure a “chancellor majority” in the Greek bailout vote and the resignation of German President Christian Wulff amid an investigation that may lead to corruption charges have left her government politically vulnerable. She has until May 25 -- when the Bundestag is scheduled to vote on the European Union’s fiscal pact on tighter budget controls -- to muster support for her debt-management strategy and the establishment of the European Stability Mechanism as a permanent rescue fund.
We hope that the price of that support will not be the introduction of a financial-transaction tax, which the German opposition is calling for as a way to pay for the stimulus that euro-area economies need. Such a tax will not only fail to reduce volatility in financial markets, but will also end up raising costs for retail investors and consumers.
At the same time, the chancellor -- and Europe -- can ill afford to see Germany reject the fiscal pact, an idea that was German-inspired. If Merkel manages to convince her government and the German public that the euro is worth saving, her chances of another term as chancellor will be much improved when national elections come next year.
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