The long and winding tale of the eurozone took a new twist yesterday, with money flooding into German bonds, taking their interest rates to the lowest ever, and with the euro extending its fall, reaching the lowest level against the dollar since August 2010.
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Meanwhile, the pressure has mounted for Germany to agree to issuing "eurobonds", guaranteed by the whole of the eurozone. That was a key issue at the informal eurozone summit in Brussels yesterday.
It is a neat idea, the logical next step in unifying the eurozone. Why cannot the entire financial weight of the monetary union be put behind its borrowing? This would cut the cost of borrowing dramatically for the weaker members and only make a marginal increase to the cost for the core ones. France's previous president wanted it, as does the present one. Most other European nations support it in some measure. Only Germany is holding out.
Well, we may end up there, but Germany has powerful reasons not to allow itself to be pushed down this particular path.
For a start, while from the outside Germany looks all powerful, with its growing economy (unlike the rest of the eurozone), its super-competitive exports, and of course this status as a safe haven for scared funds, its position is not as secure as it seems.
I am writing this from Wiesbaden, the spa town near Frankfurt, where all is calm and prosperous (I am told things hot up in the evening, when the casino gets going).
You see all around you the fruits of the German achievement. It arouses resentment as well as admiration: Germany has benefited from the euro so it can pay to keep it going.
But it has only benefited because it has squeezed down costs and consumption for more than a decade, for as is now generally recognised Germany joined the euro at too high a rate and it therefore had to follow the course of austerity it now feels the rest of the eurozone should adopt. Back in the early 2000s it had a higher rate of unemployment than France. Furthermore, it cannot afford to pay to keep the single currency going if that means underwriting a much larger part of the eurozone's debts.
I'll come to the financial numbers in a moment. First consider the key weakness of Germany: its demography. German public debt is 80 per cent of GDP, within a few percentage points of that of France, the US and UK. True, its private debt is much lower than the UK's, but this has to be serviced by the taxes of a declining workforce.
The US and UK, and to a lesser extent France, still have rising populations. Germany's workforce is already shrinking and its overall population is expected to fall in the next few years. By 2050 it is projected that Germany will have a population of some 72 million, against its present 82 million. Indeed, some estimates suggest that it will have a smaller population than the UK. Among the large European economies only Italy faces as serious an issue.
From a debt point of view this is very important: keeping debt service costs down because Germany, unlike the UK, already has a shrinking tax base.
Let's look at the numbers, which come from some work by Capital Economics.
The first graph shows the extreme levels to which 10-year bond yields have risen for Greece and Portugal and, to a lesser extent, Ireland. It also shows the similar yield on eurozone debt if it were averaged out, with Germany in particular pulling the rate down. Since the average rate has not risen over the past four years it is argued that Europe as a whole is still seen as a credit-worthy borrower.
Now look at the second graph. This shows the theoretical saving the weaker countries could make were they able to borrow at the average rate – the winners, so to speak, from eurobonds. This assumes their entire debt were redesignated as eurobonds. It also shows the losers, with Germany at the head, but the Netherlands, Finland, France and Austria also doing badly. Greece would save 15 per cent of its GDP a year if it could finance itself at 4 per cent a year, the rough, weighted average of the eurozone. By contrast, Germany's financing costs would rise by only 2.5 per cent a year.
Well that is the theoretical case for burden-sharing. But there are problems with it. For a start, that 4 per cent rate is the current rate, at a time when bond yields of major developed countries are at an all-time low. We have just had a 30-year bull market in bonds. Historically we should now expect a 30-year bear market to begin pretty soon. So that yield rationally cannot be expected to stay as low as 4 per cent.
Secondly, 2.5 per cent of GDP for Germany is huge. We are talking of €50bn (£40bn) a year. How would we cope in Britain if we had to tighten fiscal policy by another £40bn a year over and above the present cuts and tax increases?
Third, what if the very fact that Germany was taking on huge, but almost unquantifiable additional liabilities, undermined its present safe-haven status? My instinct is that if eurobonds were indeed introduced, this would draw attention to the implicit guarantees that Germany has already been giving to the rest of the eurozone via the European Central Bank. By adding new explicit guarantees to the existing implicit ones, Germany's safe-haven status would come under serious pressure.
And finally, while eurobonds could in theory at least help solve the debt problems of the fringe countries that are unable to borrow at sustainable rates, they would do nothing to solve the competitiveness problem within Europe.
Several countries need to reduce their costs by a third or more, a scale of adjustment that has never been achieved in a democracy without a devaluation – which in this case means leaving the eurozone.
The big thing to realise here is that these bond market conditions are not normal. Bond yields are lower than at any time in the 19th century, lower than in the 1930s, lower than the long squeeze after the Second World War. Therefore, they won't last.
And if long-term interest rates are bound to rise, bundling together good creditors with bad ones is a toxic policy. The harsh truth is that even Germany – prosperous, organised, secure Germany – is just not rich enough to save the eurozone.