Ben Chu: Germany can forgive the debtors – or it can throw them in the dark tower

Economic View

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The Independent Online

In Nuremberg there stands a forbidding brick tower known as the Schuldturm. In the Middle Ages this is where those who could not pay their debts were sent. The wages of bankruptcy were punishment. And they might be again. The dominant question in Europe will soon be whether Germany intends to send Greece, Ireland, Portugal – and any other eurozone state that it has to bail out – to the modern equivalent of the Schuldturm.

I have been speaking to Germans in Hamburg and Berlin this week and can confirm that a highly moral, if not quite medieval, attitude to debtors lingers. Those who live beyond their means are regarded not just as foolish, but morally deficient. And when Germans look at the global economy they see a world divided between moral savers and immoral debtors. Germans, naturally, are on the right side. Professor Peter Bofinger, of the University of Würzburg, described the German mentality to me this week as, "we did everything right, others did everything wrong".

This self-righteousness has a cruder expression. The best-selling German tabloid, Bild-Zeitung, is fond of stories about the laziness of Mediterranean nations and how they enjoy inflated wages and early retirement. Many of these are fabrication or gross exaggeration. But there is an appetite for them. Ireland, incidentally, is barely mentioned, doubtless because it does not fit the stereotype of a bunch of feckless "garlic munchers" (as one Northern European here described the struggling eurozone states to me).

But this is not the end of the story. Every German I have consulted in recent days is adamant that a break-up of the euro would be unthinkable. Those Brits who believe Germans yearn for the return of the mark are deluding themselves. And this support for the eurozone is not because German banks are all stuffed to the gills with sovereign debt from southern Europe. Most of the public is in the dark about the stupidity of their own bankers. No, the reason the German public see the break-up of the euro as unthinkable is because they regard it as the glue that holds the broader European project together. So when their Chancellor, Angela Merkel, argues one minute that the southern Europeans take too many holidays, and then claims that "if the euro fails, Europe fails", she does reflect the somewhat Janus-faced German public.

My judgement is that the euro will probably survive – at least in the short term. Ms Merkel keeps panicking the equity and bond markets through her refusal to sanction the creation of a system of eurobonds, which would back all of Europe's sovereign debt with the granite-solid credit of Germany. But as Professor Bofinger points out, throughout this crisis, Germany has eventually done everything that it said it would not do, from the original bailout of Greece, to sanctioning the purchasing of Spanish and Italian bonds by the European Financial Stability Facility. "If they look into the abyss of Italy going bust," he argues, "they will do whatever is needed". In other words, if faced with a choice between closer fiscal integration and a break-up of the eurozone, Germany would, in the end, choose integration.

So what will that closer fiscal integration look like? The eurosceptic right in Britain conjures up images of European officials (probably Germans) marching into treasury buildings across the eurozone demanding to see the books. They envisage a sort of internal eurozone IMF ordering democratically elected governments about, a humiliating loss of sovereignty for those on the receiving end.

It need not be like that. The framework would have to be stricter than the old Stability and Growth Pact, which demanded that national budget deficits remain under 3 per cent of GDP. This was widely ignored, even by Germany itself. And 11 eurozone states have smashed the 60 per cent of GDP debt ceiling set up under the Maastricht Treaty. A looser form of fiscal federalism, in which nations decide their own domestic spending priorities, within certain parameters, could work. And Greece and others already have the kind of external budgetary supervision of eurosceptic nightmares.

In fact, the greater threat for the likes of Greece, Portugal, Ireland and the rest is a weak growth outlook. Can they grow and reduce unemployment in a single currency in which Germany fails to boost its own domestic demand? That is what is needed if the eurozone deficit countries are to run a current account surplus and pay down their substantial debt piles.

Recent history does not prompt optimism. When Germany agreed to the first bailout of Greece in May 2010, it insisted on an interest rate for Greece of 5 per cent. This high figure was set to punish the country for its irresponsibility. It was the politics of the Schuldturm. That rate was unsustainable; Greece could not stabilise its debt stock (around 150 per cent of GDP) with interest payments of that size.

The Germans can save the eurozone – and probably will. But they need to give the weaker members a chance to return to prosperity. That means reasonable interest rates on emergency borrowing, some form of debt forgiveness and, most important of all, some prospect of increasing their exports. The only way to rehabilitate these debtors is for Germany to start importing more. For the 10 years after the euro's creation, domestic demand in Germany was flat, but exports rose 70 per cent in real terms. A significant proportion of those went to southern Europe. Those intra-European trade flows now need to reverse.

The unfortunate souls who were thrown in the Schuldturm had no means of escape. But the same is not true today. In a few years, once they have have balanced their budgets, countries will have an alternative: default on their debts and leave the eurozone. That would be painful. They would be severely punished by the capital markets if they wanted to borrow again. But they might judge the punishment of remaining in the eurozone to be worse. The future of the single currency could ultimately depend on whether Germany chooses rehabilitation or retribution.

Match of the day: Glazer family v Manchester United's home fans

The Glazer family has a roundabout way of conducting its business. There is a large appetite for UK-based Manchester United fans to own shares in their club, as the rapid growth of the Manchester United Supporters Trust (Must), which now has more than 172,000 members (including myself), shows.

The Florida family which bought the Old Trafford club is widely believed to need money. A simple solution presents itself: sell a stake to home-based fans.

And yet the Glazers have decided to float a stake in the club (25-30 per cent) on the Singapore stock market. They would, apparently, rather take the money of institutional investors in Asia, than of Man Utd fans in Britain. Those fans might still be able to acquire shares, but it will be a time-consuming palaver.

Of course, the reason for the family's behaviour is not really a mystery. Must has long been opposed to the Glazer regime, not least because of the £500m in debts it brought to the previously debt-free club in 2005. For the Glazers to sell a stake to Must would doubtless feel like a capitulation to the enemy. Yet there is more to the family's conduct than simple enmity. The Glazers see Man Utd as a global "franchise", with massive potential to increase revenues in the increasingly prosperous Far East. That's why they are attracted to a Singapore float. It's about promoting the "brand" of the business in Asia.

Must, though, takes the view that Man Utd is first and foremost a football club, rather than a business. Increasing revenues is important, but not as vital as success on the field. It also argues that, however popular the club is in the wider world, it must never neglect its roots in its home city.

Here we have two profoundly different philosophies. The Glazers are probably right about one thing: these are never going to co-exist peacefully.

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