“And the deep and dank tarn closed silently over the fragments of the House of Usher.” – Edgar Allan Poe
With mighty Deutsche Bank, the largest lender in Germany and symbol of the country’s economic might, in dire straits, Germans are belatedly waking up to the nightmarish reality that the supposedly masterly inactivity of their wildly overrated Chancellor has been far from masterful at all.
Instead, like the work of the incomparable Edgar Allan Poe, it is now being dramatically revealed that the seemingly impregnable political and economic edifice she has so laboriously created will soon sink back into the mire. It turns out political risk is not just for other people – for spendthrift Greeks, Italians, and Spaniards – it is also for the country that is undoubtedly the heart of Europe.
Some of Deutsche’s problems are beyond its control; profits at all European lenders have been significantly squeezed by the European Central Bank’s (ECB) extreme programme of monetary easing, as ultra-low interest rates generate fewer profits for banks, both in terms of deposits and loans. Others are more Deutsche’s direct fault, stemming from the reprehensible alleged mis-selling of US mortgage-backed securities that was the common practice before the Lehman crisis.
For this offence, US regulators are reportedly seeking to hit the bank with a draconian $14bn fine (perhaps partly in retaliation for the EU’s recent shenanigans in targeting Apple’s tax practices in Ireland). While no one alive expects Deutsche to pay this initial back-breaking cost (sanctions are traditionally negotiated downwards with Washington, with rumours the real sanction could be as low as $5.4bn), until the actual number is agreed upon, it is impossible to know exactly how bad things are for the bank. It is this uncertainty that is largely motivating hedge funds (reportedly 10 just this past week have cut their exposure) to run a mile from Deutsche.
However, even given this relative good news of a lower probable fine for Deutsche, it is far from out of the woods. There is a reason that both the bank and the German government have had to strenuously deny over the past week that a rescue was being devised. In 2007, Deutsche’s share price was €98; now it has plummeted to the teens. The simple, horrifying, Poe-like fact is that the bank is in terrible trouble.
The gothic economic reality that Deutsche Bank has exposed – that German banks can no more escape the never-ending European economic crisis than can their colleagues in supposedly less worthy Spain, Portugal, and Italy – definitively means we have reached the beginning of the end of the House of Merkel. Rather than being seen historically as the calm, wise, steady leader who competently steered Europe through the post-Lehman gales, a new, darker (and altogether more accurate) picture is emerging. Instead, the do-nothing, slow-moving Merkel will more likely be seen as a sort of modern-day Louis XV, haplessly and gormlessly doing nothing as the European project sank into the tarn.
For if the economics of a possible bailout of Deutsche are terrible, the politics are even worse. The psychological deal that has endured between Merkel and the German people has been based on the simple trade that she will keep all the ills of the world away from them – from the economic depression that has so blighted southern Europe to the perils of Russian adventurism on the continent’s periphery – if they left their critical faculties at home and trusted her.
With the economic fire spreading to Deutsche, this long-running social contract has been definitively smashed, and with it the sheep-like acquiescence of average Germans. Merkel may still win a fourth term as Chancellor (given the laughable lack of alternatives) but her aura as the ultra-competent manager of German stability and the European project is at an end.
If Deutsche continues to founder, and she does not bail out the bank, a Lehman-like run is possible. If she does allow a bailout, Merkel will have to flout recently-imposed EU-wide banking rules, which have made it much harder for Italian, Greek, and Spanish banks to be rescued by their countries.
Let us be very clear here. These are her rules, the tough conditions she offered to the German people to ensure a systemic banking crisis would never happen again. The irony is delicious; these iron-clad new rules will be violated by the very country and Chancellor that insisted upon them. German hypocrisy will be obvious to all. Expect the southern Europeans to demand full-scale revisions of German-inspired austerity (and more specifically the new banking rules) a nanosecond after Deutsche is bailed out.
Deutsche’s peril amounts to the Fall of the House of Merkel, a time where her many gormless supporters confused her do-nothing caution with wisdom. As Germany’s banking crisis makes hauntingly clear, they are not the same thing. Concerted, dramatic, and decisive (her least favourite word) action is needed to save Europe. Failing this, it will dramatically sink into the intellectual swamps from which it arose.