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25 June 2012

Germany would if it could, but it can’t so it won’t

Does Germany have a duty to bail-out the Eurozone? Some people say yes, some people say no (or rather nein seeing as most of them are German). Writing for the Washington Post, Robert Samuelson says it doesn’t matter, because the Germans couldn’t bail-out their neighbours even if they wanted to (which they don’t).

For instance, it is argued that Germany should "stimulate its own economy, hoping that spillovers would help Europe’s other economies." Sounds good in theory, but Samuelson points out some rather inconvenient facts: 

  • "Unfortunately, the effects would be modest. A ‘rise in domestic demand is unlikely to translate into much growth support for other countries,’ concludes a report from the Organization for Economic Cooperation and Development. The reason: Exports to Germany represent only 3 percent of the economies (gross domestic product) of France and Italy, 2 percent for Spain and 1 percent for Greece." 

OK, but what about ‘eurobonds’ – meaning government borrowing jointly guaranteed by all seventeen Eurozone members, thereby enabling the weaker countries to benefit from the credit worthiness of the strongest countries (especially Germany). Again, a bit of context:


  • "As for eurobonds, they would have to be issued in huge amounts to have a noticeable impact. In 2011, the euro zone’s GDP totaled 9.4 trillion euros ($11.75 trillion). Floating 10 billion or 15 billion in eurobonds would be a nonevent. But large volumes of eurobonds might hurt Germany’s credit rating."  

In other words such a scheme would either be too small to make a difference or big enough to wreck the one thing that makes it work.

In the end, it’s worth remembering that while Germany is the biggest economy in the Eurozone, it really isn’t that big: 

  • "Together, Italy’s and Spain’s economies equal Germany’s. What if France gets in trouble?"  

France get into trouble? With its fantastic Socialist government and fabulous 75% higher tax rate? The very idea!


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