Ben Chu: Why Merkel can't admit to her voters that the euro is worth paying for

Economic View

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The Independent Online

What has the euro ever done for Germany?

As they see huge bailouts for weaker nations and hear their Chancellor, Angela Merkel, criticising southern Europeans for living beyond their means, most Germans might be tempted to conclude "not much".

But they would be wrong. Two-thirds of Germany's exports go to European Union countries. And, as the graph alongside shows, two-thirds of those exports go to eurozone countries. Germany's trade with its European partners is far greater than its trade with either the US or China. Millions of German manufacturing jobs are dependent on this continental trade nexus.

The benefits are not limited to jobs. Germans have a pathological fear of inflation. And, as the other chart here shows, the euro has delivered lower average inflation over the past decade than was even achieved by the mighty German mark. As one German civil servant pointed out to me in Hamburg last week: "Germany benefits the most from the single currency and the common market. Even if there are fiscal costs for saving the system, the economic advantages are much bigger."

Yet this is a case that Germany's leaders have utterly failed to make to their voters. Rather than pointing out the benefits that the euro has delivered to the country, the government spends its time railing against eurobonds, in which the sovereign debt of all eurozone nations would be backed by the credit of Germany. The reason is politics.

It is often hard for outsiders to grasp how precarious Mrs Merkel's domestic position is. Her coalition partner, the Free Democratic Party (FDP), has collapsed in the polls. And eurobonds are the FDP's ultimate red line – if it compromises on that, it calculates, it would be finished. If Mrs Merkel were to move down the road of eurozone debt sharing, the FDP would bring down her government in an instant. Many of her own Christian Democrat MPs would rebel. New elections would most likely deliver a Social Democrat administration, which would rule in coalition with the surging Green Party (on a remarkable 20 per cent in the polls).

This is why the Chancellor is so opposed to the very suggestion of eurobonds, despite the fact that investors and politicians across Europe see such a pooling of credit risk as the only way to calm the financial markets.

Yet Mrs Merkel understands how damaging the collapse of the euro would be for her export-dependent economy. So what Germany and Europe gets from her are the minimum possible steps needed at each stage to avoid meltdown and a truck-load of moralising about the delinquent southern Europeans, so that she does not come across a soft touch at home.

Her latest challenge is to get the pretty meagre package agreed in Brussels last month, which would see a new Greek bailout and the European Financial Stability Fund given the authority to buy Spanish and Italian bonds, through the German parliament. That is by no means guaranteed. Only last week Ms Merkel's minister for labour threatened to destroy the whole deal by demanding that Greece post collateral with Germany in exchange for its €110bn of new loans.

The policy goal in Germany is less to convince the financial markets that there will be no default, than to convince the German public and its political classes that Germany will not be taken for a ride.

The talk is of "pillars of stabilisation". These would include new sanctions on eurozone nations that take on too much debt, reforms to address the lack of competitiveness of southern eurozone economies and actions to tame the financial markets.

The Germans have a point when they argue that, without a new framework for promoting economic cohesion and disciplining member states that overspend, eurobonds would not work. That would simply be an invitation for smaller states to borrow like crazy and then stick the Germans with the bill when they run out of money.

Yet, the problem is that what the German government proposes as a solution is sketchy and open to challenge. Nations that did not play by the rules would have their EU structural funds withheld. These sanctions would be "quasi automatic" and could not be blocked by individual governments in the European Council. But this new framework itself would require pan-European consent to come into being.

Moreover, it ignores the fact that Spain and Ireland ran trade surpluses during the euro boom years and held only moderate levels of public debt. That did not help them when the crash came. Germany needs to address private-sector borrowing across the eurozone, not just sovereign borrowing. On improving competitiveness, this is precisely what the so-called Lisbon Strategy of 2000 was supposed to address. And the results so far have been less than impressive. What exactly will change now?

There are other problems. It is a good idea to prevent European banks lending irresponsibly. But policymakers ignore the fact that these institutions brought such high quantities of Greek, Spanish, Irish and Portuguese sovereign debt because they believed the arguments from Brussels that default by a eurozone nation was unthinkable. Germany's solutions fail to address what went wrong.

The Berlin government seems quietly confident that it will be able to get the latest bailout approved by its parliament at the end of next month. Yet the package has to convince sovereign bond-holders across Europe, not just German MPs.

And the central problem, which German policymakers refuse to confront, is that the deal is unlikely to prove substantial enough for the markets. They know that the €440bn European Financial Stability Fund is simply not large enough to buy up the bonds of Spain and Italy should those nations run into trouble. "We can buy time," admitted one German policymaker this week, "but every time we buy time, the costs get higher."

Eurozone debt crisis...quantitative easing...and the economics of Belle de Jour

For 60 years, Nobel prize-winning economists and young stars of the discipline have been gathering on Lindau, a small island in Lake Constance, in Germany, to discuss the pressing economic topics of the day.

This week, between debates about quantitative easing and the eurozone debt crisis, they found time to contemplate the economics of Belle de Jour.

Jennifer Hafer, a graduate student of business at the University of Arkansas, presented a paper challenging the conventional wisdom that women become prostitutes because of drug or financial problems. While that is usually the case for sex workers, Hafer's research indicates that many educated and affluent women actually choose to become high-end prostitutes.

"Women are not forced into the prostitution market," she argues, "but rather choose to enter it for many of the reasons people enter the conventional job market – money, stability, autonomy, even job satisfaction." Her conclusion is that high-end prostitution should be legalised and regulated.

And yet Hafer does not recommend that street prostitution be legalised. She says there are negative "externalities" to street walking. Belle de Jour doesn't make neighbourhoods seedy and threatening, whereas street prostitutes, and the kind of clients they attract, do.

Yet the solution is to legalise prostitution in defined areas to reduce those externalities, rather than continue with a policy that works so fundamentally against human nature. Indeed, legalised street-level prostitution is already practised by Germany.

Here in Hamburg, it is legal at certain times of the day on Davidstrasse. The result is a more civilised atmosphere than prevails in many other similar cities. In this one area at least, Germany is offering the world practical solutions, rather than counter-productive moralising.

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