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Why Germans aren’t so crazy about the idea of a Euro Bailout.

November 29, 2011 by Peter

As the clock continues to tick on Europe, like everyone else we’ve been wondering what the options are. Henry Blodget at Business Insider and Gavyn Davies at the Financial Times have both done a good job laying out several. One they both share, and one that’s been getting a lot of attention is the idea of a bail out. With all the countries in Europe seemingly in trouble, why hasn’t this happened?

Well Germany doesn’t want to play nice it seems. First they don’t even believe there is a Euro Crisis going on. Specifically Jens Wiedmann, the head of the Bundesbank (Germany’s central bank), in an interview with The Financial Times said he “doesn’t really see a euro crisis, but rather a series of individual, idiosyncratic crises in the various countries that have gotten into trouble.” When questioned on the responsibility of the European Central Bank he said its, “to ensure price stability and to support the competent authorities in ensuring financial stability”.  Which doesn’t scream bail out, it sounds a lot more an Austrian motive (economic theory).

So what’s going on? Do Germans really think there isnt a crisis? Well Germans are opposed to a bail out for two main reasons regardless of the validity of a crisis. First politically, an ECB bailout would be suicide for German politicians. Germans are culturally hardworking (or so they claim) and very judgmental of their neighboring countries for being “lazy”. For a German politician to bail out their “lazy” neighbors would not be a good idea for re-election.

Second, the German economy for the past 10yrs has relied on exports and low wage growth for stability. Thus Germans are terrified that huge ECB intervention would trigger massive inflation that would destroy the value of the Euro and cut their wages.

The challenge then for Germany is how to save the Euro without causing massive inflation. Germany needs/likes a weak Euro. A weak Euro helps with trade, and keeps inflation low, which is good for German workers and the countries economy (Germany has the lowest real wage growth in the Euro). If Germany allows the Euro to die, it will have to default to Mark which will be a strong currency (as compared to the Euro) that erodes its competitiveness and wages. Perhaps in some sinister way, Germany needs Greece, Italy and Spain to continue to devalue the Euro, which balances the currency rise and keeps Germany competitive.

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