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.