Even Germany is feeling the pressure

 
Allister Heath
WHO will bail-out the bail-outers? That is the grim, almost philosophical, question facing the Eurozone this morning. Germany and its long-suffering taxpayers were meant to be the last chance for the Eurozone, the milch cow that would eventually be forced to step in, cheque book in hand, to prevent a calamitous collapse triggered by the incompetence of the southern European nations. Yet yesterday it too suffered humiliation, with global institutions staging a buyers’ strike and refusing to buy its bonds. To add insult to injury, all of this happened on a day when Standard & Poor’s raised formerly bankrupt but now recovering Iceland’s outlook from negative to stable.

Some economists have been warning for weeks that Germany isn’t a safe haven. Strategy Economics, run by Matthew Lynn, argues that Germany’s AAA credit rating is as much at risk as France’s. The figures are shocking – the general view of Germany as an ultra-disciplined, low debt economy has no basis in reality. German debt as a percentage of GDP has been climbing; Angela Merkel’s rhetoric is at odds with the actions of her government.

Public debt was 65 per cent of GDP in 2007, rising to 74.4 per cent of GDP last year, and to 83.2 per cent this year, according to Strategy Economics. This is not that different to Belgium’s 96.2 per cent, Ireland’s 94.9 per cent and Portugal’s 93.3 per cent. Germany’s national debt is higher than France’s (82.3 per cent) and Spain’s (61 per cent), both of which have seen bond yields rocket in recent weeks. The situation is not good – and that is before the European Financial Stability Facility or any plans for Eurobonds to federalise more Eurozone debt and hence for the German taxpayer to shoulder part of the burden of others’ profligacy. In theory, Berlin has a plan to slash the deficit and stabilise the national debt as a share of GDP; but its forecasts could easily be derailed.

The markets are warning about four key issues in particular that could ruin Merkel’s austerity plans. The first is that German debt is already too high. The second is that economic growth is grinding to a halt, with much of the Eurozone already in recession; Germany’s performance over the next year could easily turn out to be far worse than anybody is expecting, pushing up the national debt even further. The third is that the cost of rescuing other Eurozone countries is going to be prohibitive; the horrible reality is that Germany simply cannot afford to bail out its neighbours. It too would go bust if it tried. Last but not least, large private institutions and clearinghouses are all now actively working on contingency plans in case one or more countries quits the euro. A break up of the single currency is becoming ever more likely; it is no longer taboo to discuss the possibility openly. That would mean massive write-offs to the value of private and public assets in those countries that leave and adopt a weak and untested currency; it would guarantee another recession and financial crisis in Germany and elsewhere.

The UK shouldn’t gloat. George Osborne’s necessary austerity policies have so far prevented a run on the pound. But the main reason why UK gilt yields hit record lows yesterday is that the Bank of England is monetising the entirety of the government’s borrowing thanks to its latest £75bn QE programme. The UK economy isn’t a haven – and it isn’t safe.

allister.heath@cityam.com
Follow me on Twitter: @allisterheath