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

UniSuper’s boss flags a potential correction ahead

The CIO of Australia’s fourth largest super fund by assets, John Pearce, suggests the odds favour a flat year for markets, with the possibility of a correction of 10% or more. However, he’ll use any dip as a buying opportunity.

16 ASX stocks to buy and hold forever, updated

This time last year, I highlighted 16 ASX stocks that investors could own indefinitely. One year on, I look at whether there should be any changes to the list of stocks as well as which companies are worth buying now. 

Retirement is a risky business for most people

While encouraging people to draw down on their accumulated wealth in retirement might be good public policy, several million retirees disagree because they are purposefully conserving that capital. It’s time for a different approach.

Is Gen X ready for retirement?

With the arrival of the new year, the first members of ‘Generation X’ turned 60, marking the start of the MTV generation’s collective journey towards retirement. Are Gen Xers and our retirement system ready for the transition?

Reform overdue for family home CGT exemption

The capital gains tax main residence exemption is no longer 'fit for purpose', due to its inequities, inefficiency, and complexity. Here are several suggestions for adapting or curtailing the concession.

So, we are not spending our super balances. So what!

A Grattan Institute report suggests lifetime annuities as a solution to people not spending their super balances. The issue is whether underspending is the real problem or a sign of more fundamental failings in our retirement system.

Latest Updates

Shares

16 ASX stocks to buy and hold forever, updated

This time last year, I highlighted 16 ASX stocks that investors could own indefinitely. One year on, I look at whether there should be any changes to the list of stocks as well as which companies are worth buying now. 

Superannuation

2025-26 super thresholds – key changes and implications

The ABS recently released figures which are used to determine key superannuation rates and thresholds that will apply from 1 July 2025. This outlines the rates and thresholds that are changing and those that aren’t.  

Shares

The naysayers may be wrong again on the Big Four banks

While much of the investment industry recommends selling the banks, many were saying the same thing 12 months ago. The reporting season shows why bank shareholders should be rewarded for ignoring the current market noise.

Superannuation

Unpacking investment risk in superannuation

Understanding investment risk in superannuation is crucial for your retirement account. Here's a guide on how to define, take, and manage risk to select the right investment mix tailored to your unique circumstances.

Economy

This 'forgotten' inflation indicator signals better times ahead

Money supply provides an early and good read on whether the cash rate setting is transmitting to accelerating, steady or slowing price pressures. This explores recent data on money supply and what lies ahead for inflation.  

Investment strategies

The biggest and most ignored catalyst for emerging market stocks

Relative valuations and superior GDP growth alone are not compelling enough reasons for an improvement in emerging market equity returns. Earnings growth looks more likely to revive the asset class’s strong long-term record.

Property

Has Australian commercial property bottomed?

Commercial property took a beating in recent years as markets adjusted to higher interest rates. From here, strong demand tailwinds and a sharp fall in fresh supply could support solid returns for the best assets.

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.