On April 9 George Soros published a “much-celebrated column”:http://www.project-syndicate.org/commentary/a-simple-solution-to-the-euro-crisis-by-george-soros on the website “Project Syndicate” (funded by his own “Open Society Institute”) that asked Germany to make a decision: leave the euro or accept the Eurobonds. Mr. Soros’ article continued the argument he had previously presented in “an article”:http://www.project-syndicate.org/commentary/why-germany-should-lead-or-leave-by-george-soros (published on September 8, 2012) titled “Why Germany should lead or leave.”
The case for Germany’s exit from the Eurozone is clear: Without Germany, the euro would depreciate and facilitate the recovery of Southern countries, which would become more competitive again. In exchange, Germany would no longer have to make a formal commitment to “help” the other states to finance their recovery. The case for a German exit is more persuasive than the case for an Italian exit from the Eurozone, because Italy would crumble if left to its own devices, and it would pull the global financial system with it.
Back in Germany, the two financial portals geld.de and boersennews.de have commissioned a study on Eurobonds. It finds that the group of “wealthy” countries – Germany, France, the Netherlands, Austria, Belgium, Finland, and Luxemburg – could face additional costs of up to 323 billion euros over the next ten years if Eurobonds became a reality. Germans could be forced to shoulder as much as 62 percent of the additional debt burden, or 200 billion euros.
Money is never really “created” within the Eurozone but only transferred. So alongside the potential “big loser” Germany, there’s also a big winner of Eurobonds. It’s this winner that arouses the most significant suspicions in the German mind: A country where populism reigns, where state officials abide by lax moral codes and where government sometimes seems non-existent. I’m talking about Italy, of course. According to the aforementioned study, Italy could gain as much as 170 billion from Eurobonds and from the resulting discount of public debt interest payments. Other countries would benefit as well. Greece (with an economy valued around 220 billion euros) could expect around 84 billion euros in benefits over the coming decade, Spain could expect 55 billion, Portugal 37 billion, and Ireland 11 billion.
Given these numbers, it appears as if the answer to George Soros is evident: Germany does not want the Eurobond. Possibly, Germany should consider an exit from the euro, and other countries should begin to pay their own bills. The problem is that if Germany actually started to think this way, the results would be suicidal.
First, some parts of the German elite suffer from a particular kind of shortcoming: they like to overstate Germany’s merits in public and in private. Germany has the most successful track record of the industrialized world over the last ten years (economically, socially, industrially), and the country has had the good fortune of enjoying a period of world-class leadership. Yet the risks are easily overlooked. German exports benefitted from the structural flaws of the euro, and downplaying their effects does not solve the problem of an uncertain future.
Second, the potential costs of a German exit should be compared to the 200 billion euros of additional public debt that have to be shouldered. Like it or not, if Germany exited the Eurozone there would be no leader capable of carrying out reforms in Southern Europe. German leadership (not austerity!) is need. The vicious circle of Germans asking for more budget cuts and Italians voting for Beppe Grillo-style populists (to which Germans react by imposing more austerity measures) has to be finally broken. Inspiration for Italy can only come from abroad.
Third, troubled countries may soon understand that Germany could be the big loser (if it exits or if it stays) and start to blackmail it – Beppe Grillo already is a weapon that can be used to threaten Germany. The current German system can be compared to a “European China”: Growth is the pillar of German stability, and growth is based on exports. In other words: the euro is of fundamental importance to the German economy, and the rest of Europe knows it.
The point here is that Eurobonds don’t quite work as the German study predicts. The world of economics is neither deterministic, nor can it be reduced to a simple scientific formula. Eurobonds with German cooperation would allow for the development of a new cooperative framework in which Germany could have real leverage to push for real reforms in Southern Europe. If budget cuts plus tax increases plus labor reforms (and many other reforms) work, it would be the economic equivalent of 2+2=5. The sum would be worth more than its parts. Eurobonds would be the oxygen that prevents the suffocation of Rome and Athens amidst anti-German demonstrations.
Leadership requires flexibility and some sacrifice if one wants to enjoy better conditions in the longer term. Germany should show Europe that it is ready to socialize debt under clear conditions. Carrying on as before, with agreements written on the fly, won’t help Europe. But is Germany up to the task?