Ben Chu: Germany is not bailing out Europe, it is rescuing itself

Huge transfers are still required. Without more honesty from Germany this crisis will not end well

Poor Germany, forced to provide massive guarantees for its profligate European neighbours. The Federal Republic did everything right – pushing its domestic labour costs down, keeping public borrowing low. And its neighbours did everything wrong – letting wages spiral and running up big public debt piles. But now prudent Germany is being forced to foot the entire bill.

Click HERE to view graphic

And even without the additional costs of bailing out Greece, Ireland, Portugal, Spain and Cyprus, Berlin is facing a catastrophic bill thanks to the European Central Bank's (ECB) provision of liquidity life support for the eurozone's banking system. The Bundesbank has racked up vast claims against other central banks through the monetary clearing system known as "Target 2".

That's the standard narrative from Germany. And it's largely false. The guarantees that Germany has extended – and the huge liquidity operations of the ECB – have indeed been used to assist the struggling nations of the eurozone periphery. But they have also, as new research from Goldman Sachs show, been used to bail out German banks.

Germany ran persistent current account surpluses through much of the last decade, as Chart 1 above shows, meaning that its households and businesses, in aggregate, earned more than they spent. That means, inevitably, that Germany accumulated huge foreign claims. As Chart 2 shows, these reached €1trn (£803bn) by 2011.

How does this work? German households and businesses deposited their financial surpluses at German banks and fund managers. Those institutions then used these savings to buy assets abroad. Most of them were invested across the eurozone. These included all manner of assets, ranging from the debt of Irish banks, to Spanish real estate firms, to Greek equities. That's correct: German banks helped inflate the bubbles that have now exploded across the eurozone with such disastrous consequences

Here's where it gets interesting. German banks have been steadily extricating themselves from their exposure to southern Europe since 2007, as Chart 3 shows. German banks' gross credit claims against the nations of the eurozone periphery have fallen by 50 per cent, down to €300bn. They have been busily off-loading eurozone assets to reduce the risks to their balance sheets.

And that has been taking place as the ECB has been extending its own balance sheet by providing cheap lending for banks across the continent to prevent them from running out of money. Here's how that works:German banks have stopped lending to eurozone periphery banks. And those banks have been forced to fund themselves, instead, by tapping the ECB for cash.

But the risks return. Eurozone periphery nations are still running trade deficits with Germany. Those deficits that were previously financed by private German banks are now financed by the ECB. And thanks to the mechanics of the European monetary system that has resulted in the ballooning of the Bundesbank's claims against other eurozone central banks.

"It is no coincidence that the increase in net foreign assets on the Bundesbank's balance sheet roughly matches the decline seen on banks' balance sheets," said Dirk Schumacher of Goldman. "The Target 2 imbalances … have mainly replaced financial risk that was previously sitting on private-sector balance sheets."

What this means is that the ECB and eurozone governments, as well as bailing out other members states, have quietly been rescuing German banks and, by extension, German savers. Without these emergency operations, the eurozone would have broken up, German banks would have gone bust and the savings of many ordinary Germans might have been wiped out. More likely the German taxpayer would have had been forced to bail out those banks.

So, as the German people distribute blame for the situation in which they find themselves, they should not ignore their own bankers. If those institutions had not made these investments and financed the current account deficits of Germany's neighbours for so many years, their country would not be on the hook for hundreds of billions of euros of bad debts.

Yet this is something German politicians refuse to acknowledge. Jorg Asmussen, a former German finance ministry official and now a member of the ECB board made a trip to Ireland in April, where he rejected calls for the costs that the former Celtic Tiger incurred in bailing out its own banks in 2008 to be shared with the rest of the eurozone.

He said: "I frequently hear in the Irish debate that the debt resulting from the bank rescue is not Ireland's debt… But... in the run-up to the crisis, insufficient domestic policies (banking supervision and economic policies) played a major role in excessive credit growth."

Sheer hypocrisy. No one denies Irish banks and regulators were incompetent and corrupt. But what about the European banks – including German financial institutions – that lent to them? Ireland's banks could not have perpetrated their idiocy without them. For every profligate borrower there is a profligate lender. And Germany in the 2000s, thanks to its current account surplus, was the biggest profligate lender in the eurozone.

Mr Asmussen said the Irish people should bear the consequences of their politicians' failure to supervise their banks. But what about the failure of German politicians, such as him, to supervise German banks?

In fairness, German rhetoric has begun to diverge from policy. In Brussels last week Ms Merkel approved a plan to allow the European bailout funds to recapitalise bust European banks directly, without heaping the burden onto nation states.

Yet without more honesty from Germany this crisis will not end well. Huge transfers are still required from Germany to the periphery if the single currency is to survive. Those are likely to be politically impossible unless German politicians start to explain to their people that Germany is not only bailing out its neighbours, but bailing out itself.

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Customer Service Administrator

£13000 - £15000 per annum: Recruitment Genius: Are you passionate about custom...

Recruitment Genius: Dialler Administrator

£22000 - £25000 per annum: Recruitment Genius: Main purpose: Under the directi...

Ashdown Group: Contracts Manager - City of London

£35000 - £37000 per annum + benefits : Ashdown Group: Contracts Manager - City...

Guru Careers: Tax Manager / Accountant

£35 - £50k DOE: Guru Careers: A Tax Manager / Accountant (ACA / CA / CTA) is n...

Day In a Page

Blairites be warned, this could be the moment Labour turns into Syriza

Andrew Grice: Inside Westminster

Blairites be warned, this could be the moment Labour turns into Syriza
HMS Victory: The mystery of Britain's worst naval disaster is finally solved - 271 years later

The mystery of Britain's worst naval disaster is finally solved - 271 years later

Exclusive: David Keys reveals the research that finally explains why HMS Victory went down with the loss of 1,100 lives
Survivors of the Nagasaki atomic bomb attack: Japan must not abandon its post-war pacifism

'I saw people so injured you couldn't tell if they were dead or alive'

Nagasaki survivors on why Japan must not abandon its post-war pacifism
Jon Stewart: The voice of Democrats who felt Obama had failed to deliver on his 'Yes We Can' slogan, and the voter he tried hardest to keep onside

The voter Obama tried hardest to keep onside

Outgoing The Daily Show host, Jon Stewart, became the voice of Democrats who felt the President had failed to deliver on his ‘Yes We Can’ slogan. Tim Walker charts the ups and downs of their 10-year relationship on screen
RuPaul interview: The drag star on being inspired by Bowie, never fitting in, and saying the first thing that comes into your head

RuPaul interview

The drag star on being inspired by Bowie, never fitting in, and saying the first thing that comes into your head
Secrets of comedy couples: What's it like when both you and your partner are stand-ups?

Secrets of comedy couples

What's it like when both you and your partner are stand-ups?
Satya Nadella: As Windows 10 is launched can he return Microsoft to its former glory?

Satya Nadella: The man to clean up for Windows?

While Microsoft's founders spend their billions, the once-invincible tech company's new boss is trying to save it
The best swimwear for men: From trunks to shorts, make a splash this summer

The best swimwear for men

From trunks to shorts, make a splash this summer
Mark Hix recipes: Our chef tries his hand at a spot of summer foraging

Mark Hix goes summer foraging

 A dinner party doesn't have to mean a trip to the supermarket
Ashes 2015: With an audacious flourish, home hero Ian Bell ends all debate

With an audacious flourish, the home hero ends all debate

Ian Bell advances to Trent Bridge next week almost as undroppable as Alastair Cook and Joe Root, a cornerstone of England's new thinking, says Kevin Garside
Aaron Ramsey interview: Wales midfielder determined to be centre of attention for Arsenal this season

Aaron Ramsey interview

Wales midfielder determined to be centre of attention for Arsenal this season
Community Shield: Arsene Wenger needs to strike first blow in rivalry with Jose Mourinho

Community Shield gives Wenger chance to strike first blow in rivalry with Mourinho

As long as the Arsenal manager's run of games without a win over his Chelsea counterpart continues it will continue to dominate the narrative around the two men
The unlikely rise of AFC Bournemouth - and what it says about English life

Unlikely rise of AFC Bournemouth

Bournemouth’s elevation to football’s top tier is one of the most improbable of recent times. But it’s illustrative of deeper and wider changes in English life
A Very British Coup, part two: New novel in pipeline as Jeremy Corbyn's rise inspires sequel

A Very British Coup, part two

New novel in pipeline as Jeremy Corbyn's rise inspires sequel
Philae lander data show comets could have brought 'building blocks of life' to Earth

Philae lander data show comets could have brought 'building blocks of life' to Earth

Icy dust layer holds organic compounds similar to those found in living organisms