Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 394

Germany will do the minimum to support the euro ... and Europe

Remember the GFC?

In September 2008, UK authorities realised troubled mortgage lender Bradford & Bingley could topple the country’s financial system. Belgium-based giant Fortis faced closure. The French administration of President Nicolas Sarkozy was battling to save Franco-Belgian lender Dexia. The German government of Angela Merkel was preoccupied with rescuing Hypo Real Estate. Then the three biggest Irish banks, whose balance sheets amounted to 700% of Ireland’s GDP, tottered. A panic-stricken Dublin effectively bankrupted the country by guaranteeing the deposits and liabilities of the country’s six largest banks.

Little love lost between leaders

To save Europe’s financial system, the Dutch government proposed each country should establish bank-rescue funds on a common basis by contributing 3% of GDP, which would amount to 300 billion euros. Sarkozy supported the joint measures and invited the leaders of Germany, Italy and the UK to Paris to discuss the idea, which Italy quickly backed.

But Merkel denounced the proposal and threatened to boycott the Paris gathering if it was called a “crisis” meeting. The summit went ahead but failed to agree on joint solutions. Sarkozy blamed Merkel. “You know what she said to me? Chacun sa merde. (To each his own shit).”

Now, German officials denied Merkel used such French. They said Merkel quoted Goethe in German that ‘everyone should sweep in front of his door and every city quarter will be clean’. Whatever Merkel said, both responses describe Germany’s ambivalent attitude towards securing the future of the euro during the GFC and the eurozone debt crisis of 2010 to 2015.

Germany has just done enough in the past

Many times when the euro’s future needed cementing, Germany watered down or refused joint solutions if they imperilled German taxpayers. Berlin vetoed fiscal-transfer solutions, ruled out sovereign debt pooling (eurobonds) and thwarted the proper banking union needed to snap the ‘doom loop’ between banks and governments. Berlin delayed, then constrained, European Central Bank remedies such as quantitative easing. It placed an inadequate cap on the European rescue fund.

From 2010, to deal with Greece’s insolvency, Berlin opposed the default the country needed, inflicted measures that impoverished Greek society and sanctioned bailouts that only rescued foreign banks. In 2011, Berlin imposed austerity across Europe despite the huge social costs inflicted. In 2012, Germany initially disowned ECB president Mario Draghi’s ‘whatever it takes’ comment that saved the euro.

Yet, over these years, Germany always did enough to preserve the eurozone, even at some risk and cost to German treasure. Berlin sanctioned the small rescue fund and authorised baby steps towards a partial banking union. Merkel permitted ECB asset-buying and swung behind Draghi’s whatever-it-takes bluff. In 2020, Merkel probably performed the biggest U-turn of her career when she approved a 750-billion-euro recovery package funded by eurobonds. But the stimulus was a one-off, paltry and delayed.

Confusion about Germany’s intentions for the euro has given birth to the German verb ‘merkeln’, meaning to dither. Germany’s ambivalent attitude and minimalist approach to the euro could be tested again soon enough and possibly before Merkel retires as leader in September after 16 years as chancellor. The covid-19 pandemic has ravaged Europe’s economy, jolted anew by a winter-wave of infections.

Ultimately, the best solution for the currency union in its current state is for it to be enmeshed in a political and fiscal union that would allow German wealth to flow to weaker parts of the eurozone.

But German leaders are unlikely any time soon to take such breakthrough steps for five reasons.

The first is the natural selfishness of sovereign bodies as shown by how parochial Australian states turned during the pandemic.

The second is that Germany’s recent history makes it reluctant to lead.

A third reason is the German view that its neighbours have heaped misfortune on themselves.

A fourth is disquiet that the lax monetary policy of the ECB penalises German savers and subsidises undeserving southerners.

The fifth reason, perhaps the most obscure, is that rising inequality in Germany acts against a consensus that Germany should dispense its resources to save Europe – after all, many Germans think it is they who need help. So expect Berlin to do only the minimum required to hold together the currency union in its present form.

Germany reluctant to drive complete union

To be sure, a big-enough emergency coupled with ‘enlightened self-interest’ could prompt Berlin to take grand steps towards the political and fiscal union the euro demands because if the eurozone fails Germany will suffer too. Debtor countries and other creditor countries, not just Germany, could determine the destiny of the eurozone.

But no euro user approaches Germany’s pivotal position to determine the currency’s fate. Even amid sporadic crises, the eurozone could stumble along as an incomplete currency union for decades yet. Germany has no intention of pulling out – the euro keeps German exports more competitive than would a return to the Deutsche mark.

It’s just that, if need be, German policymakers will find it hard to win their population’s assent to take watershed steps to secure the euro. Thus, keep in mind either of the comments attributed to Merkel in that 2008 emergency meeting next time the eurozone is engulfed in crisis and that while Berlin can take only a minimalist approach towards the euro, the currency’s future will never be guaranteed.

 

Michael Collins is an Investment Specialist at Magellan Asset Management, a sponsor of Firstlinks. This article is for general information purposes only, not investment advice. For the full version of this article and to view sources, go to: https://www.magellangroup.com.au/insights/.

For more articles and papers from Magellan, please click here.

 

RELATED ARTICLES

Greece: Scylla and Charybdis

banner

Most viewed in recent weeks

Australian house prices close in on world record

Sydney is set to become the world’s most expensive city for housing over the next 12 months, a new report shows. Our other major cities aren’t far behind unless there are major changes to improve housing affordability.

The case for the $3 million super tax

The Government's proposed tax has copped a lot of flack though I think it's a reasonable approach to improve the long-term sustainability of superannuation and the retirement income system. Here’s why.

Tariffs are a smokescreen to Trump's real endgame

Behind market volatility and tariff threats lies a deeper strategy. Trump’s real goal isn’t trade reform but managing America's massive debts, preserving bond market confidence, and preparing for potential QE.

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

The super tax and the defined benefits scandal

Australia's superannuation inequities date back to poor decisions made by Parliament two decades ago. If super for the wealthy needs resetting, so too does the defined benefits schemes for our public servants.

Getting rich vs staying rich

Strategies to get rich versus stay rich are markedly different. Here is a look at the five main ways to get rich, including through work, business, investing and luck, as well as those that preserve wealth.

Latest Updates

The revolt against Baby Boomer wealth

The $3m super tax could be put down to the Government needing money and the wealthy being easy targets. It’s deeper than that though and this looks at the factors behind the policy and why more taxes on the wealthy are coming.

Superannuation

How to prevent excessive superannuation balances

There is an alternative, simpler approach which could be used to mitigate some of the difficulties that the proposed super tax has for holders of large assets such as properties, businesses and farms in SMSFs.

Shares

US shares: Ambitious multiples on ambitious EPS forecasts

Here's a detailed look at how current valuations and profit forecasts for the S&P 500 stack up versus history. The answer? Both seem excessive, making the market vulnerable to a correction or worse.

Taxation

Family trust tax: When is a loan not a loan?

A recent ruling could change the tax payable by beneficiaries of family trusts. If the ATO has previously demanded extra payments on unpaid present entitlements in your family group, you should watch this space.

Property

Things you must consider before subdividing a property

Subdividing can offer a lucrative first step into property development. Yet it comes with legal, planning and unexpected tax considerations that should be understood from an early stage to avoid surprises.

Investment strategies

5 insights that put market volatility in perspective

Though it may feel like this time is different, markets have shown resilience throughout history when confronted by wars, pandemics and other crises. In many cases, the best course of action has been none at all.

Strategy

Concerns about China's rise to power seem overblown

China has always managed its affairs in a very different way to Western countries and empires. For those concerned about China's rise as a global power, the big question is whether this approach could change.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.