Reluctant EU leader puts economics first

Germans know the score: they might not want to pay for problems in Europe but the alternative — eurozone break-up — would be far more costly. Meanwhile, the politicians have realised that to preserve the euro, Germany has had to become Europe’s leader — a position that, given the country’s history, makes many citizens uncomfortable. Chris Wright reports.

  • 26 Mar 2013
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One might think an election year would be an uncertain time for Germany’s relationship with Europe and the euro. For years, Germany has been called upon to make ever-greater commitments to peripheral members of the eurozone to keep them in the single currency. With an election in September, surely there is a danger of a populist anti-austerity party destabilising Chancellor Merkel’s progress, as was the case in the Italian election when two-thirds of the vote went to candidates opposed to austerity?

But this would be to misunderstand German sentiment towards the single currency. "In European affairs it doesn’t make any difference if we have Chancellor Merkel or Steinbruck," says Torsten Windels, chief economist at NordLB in Hannover.

Why? Because, political support for the euro in Germany is now all but universal. "The fundamental stance of German politics, to do everything to stabilise the euro, should not change this year no matter what happens in the election," says Ralph Solveen, deputy head of economic research at Commerzbank in Frankfurt. "Nobody is against preserving the euro."

This is a considerable shift in attitude. "In the beginning of the process [the European debt crisis] in 2010, there was a view in the parliament: we don’t want to pay for Greece, for Portugal, for Spain, and we don’t want to have more institutions outside the German constitution," recalls Windels. "We have learned since that we have no alternative, because our backbone is Europe. Our export markets in Europe are much more important than those in North America. They have learned in Berlin: it’s not nice to pay for problems in Europe, but it’s much more expensive to have a break-up of the eurozone."

This point about exports is explored in greater detail in other chapters in this report, but the crux of it is that eurozone countries still account for the biggest chunk of German exports, and therefore the health of those countries, and their membership of the single currency, is essential to Germany’s health.

"There is a very simple economic reason" for Germany’s continuing support, says Stefan Bielmeier, chief economist at DZ Bank in Frankfurt. "Just over 40% of German exports go into the euro area. All the European countries are facing a challenge of declining demographics, and to keep up our negotiating power in the globalised world, we need to put our full weight into the euro area. For Germany, it would be much harder to push through its agenda on a globalised level without the euro."

Commitment to the cause

On top of that, a huge and irreversible commitment has already been made. "We have already engaged so strongly in preserving the euro," says Solveen, "with the credit given to other countries, that if the euro were to break up, that money would be lost and the government would have a problem to explain where the $600bn, $700bn, $800bn has gone."

To put it another way: Germany has no choice and is in for the long haul no matter how hard that becomes. Gernot Griebling, in macro research at Landesbank Baden-Wurttemberg (LBBW) in Stuttgart, once calculated the claims of German banks against debtors in other eurozone states, be they private corporations, banks or the sovereigns themselves, and imagined what would happen if the eurozone split and the legacy currencies returned.

"In the aftermath I would expect all other currencies to depreciate against a newly introduced German mark," he says. "German banks would have to write off a large amount of their claims against these debtors depending on the amount those currencies depreciated, and if this was to happen, then taken together the total tier one capital of the German banks would be wiped out."

That would, clearly, be apocalyptic for German banking and the economy. "It would be a huge disaster, because the state would not be able to recapitalize the banks in these dimensions," adds Griebling. "You’re talking about something like €140bn-€150bn."

The appreciation of the mark would also damage the German economy. "We would go into a deep recession in comparison to which the year 2009 was a Sunday afternoon walk. It is in the very best interests of Germany to do anything to keep the eurozone together, even if the public would not agree."

An uncomfortable leader

Germany is back in a position of leadership in Europe — not one it courted. "Germany has assumed a pivotal role in the course of the euro crisis — a role that German politicians did not really wish to achieve in Europe," says Barbara Boettcher, head of the economic and European policy team at Deutsche Bank in Frankfurt. "Germany is very committed to European integration because we do not want there to be just one leading country in Europe, but instead a constructive co-operation between small, medium and larger-sized countries to make Europe a strong global player."

Windels makes a similar point. "It’s complicated in Europe, because you can’t lead Europe from Berlin," he says. "So we were in a new position. Berlin took two years to learn this new role. They didn’t want to have it, but from May 2010, they had it. After that, they have learned a lot, and today we are far away from where we began."

This touches upon a discomfort in Germany about any idea of being un-European or, worse, nationalist. "The country has to be Europe-friendly, based on our history," says Solveen.

This sensitivity also manifests itself in policy towards other eurozone countries. As Reinhard Cluse, chief economist for Europe and emerging EMEA at UBS Investment Bank, says: "Among the leading political class they are still very much conscious of German responsibility and history, and they do not want to rock the boat. During the crisis in Greece, you could see Merkel did not want to be the one to push Greece out of the eurozone."

Windels at NordLB believes there was a pivotal moment in 2010, when "the leadership came to Berlin" on euroland. "There was a change in European policy," he says. "The state debt crisis in Greece was the first peak, from February to April 2010, and by April and May Germany had decided: now it is time to save money. That is when leadership came to Berlin."

There was a collective realisation that markets would not tolerate anything other than a reduction in debts. "If France, for example, had decided not to save money, or not to consolidate, they would have paid higher spreads a day later. This punishment by the markets has worked very well."

Germany was naturally placed to take the lead. "Germany is a very strong economy with a very competitive corporate sector, and it had the trust of the markets and the leadership to save money," adds Windels.

Uneasy or otherwise, Germany is where it is: the safe haven and economic dynamo of Europe, and the one that must marshall other nations to do what they need to do to preserve the euro. It is not an easy position, although Boettcher is impressed. "The electorate feels Chancellor Merkel has been skillful in walking the fine line between the interests of Germany and the other creditor countries, while trying to show fiscal solidarity with countries that are in trouble," she says.

Balancing act

Germany’s role in Europe will continue to require this balancing act between supporting member states and cajoling them into action. Continuing support "will be linked to some kind of conditionality," Boettcher says. "It would be difficult to sell financial support for other countries, to the extent that the German taxpayer is assuming liabilities, if we didn’t think there was commitment to reform and improved economic performance on the part of the recipient countries."

Still, where once there was some antagonism between neighbours about fiscal targets, there is a sense now that the picture — and Germany’s likely attitude — varies from one country to another. "If the German government sees, for example, the Rajoy government in Spain make a huge effort to implement reform but still overshoot its fiscal targets, there will probably be a willingness to compromise," suggests Cluse. "The Spanish government will still have to do more austerity, but the German government will understand that a softening of targets may be due and warranted." That’s Spain. But the attitude won’t be universal. "But if in a country like Greece a new government comes in and says austerity is over, it will be extremely difficult for Germany or any core Europe government to continue the programmes and transfers, because it’s just impossible to sell to local taxpayers," says Cluse, adding that if Italy’s new governmen wants to abandon austerity altogether, it would be a problem, as public debt to GDP is at 125%.

HSBC’s chief European economist Janet Henry says with no expectations for further big developments in eurozone integration this year, that should help Merkel as the election looms. "The domestic electorate and gaining re-election are more immediate priorities, rather than making rapid progress at the eurozone level. Many of the key decisions on eurozone integration will not be taken until 2014 or even later."

Still, at the European Council meeting in June, the next major report on banking and economic integration will be published. "You could see renewed tensions between France and Germany," Henry says. "We need to see France move closer to Germany on fiscal discipline, the loss of sovereignty to Brussels, surveillance of budgets and adherence to fiscal targets. So she [Merkel] can’t afford to ignore the international side of things entirely, but it will not be the priority unless market pressure returns."

Cluse notes it would be difficult for Germany to take a hard-line stance if new eurozone problems arrive around election time, in case it poisons sentiment; and European banking union also creates headaches. "I have heard officials in Berlin say: ‘we do not want banking union to be a fiscal union through the back door’," he says.

But the mood in Germany about Europe is positive, with a sense of progress, even if one country is driving it. "Now we have more or less a consensus in the eurozone on consolidation," says Windels. He argues that Germany has an advantage, in that the reform of Chancellor Schroeder’s second administration helped Germany in a way that President in Hollande would now find useful for France. "It took four years for Germany to learn what was necessary for the modernisation of the economy. Mr Hollande has one year to learn the same thing for France, to organize a strong economy. Germany is leading, because of its economic power."

  • 26 Mar 2013

Bookrunners of Global Covered Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 18 Oct 2016
1 UBS 11,121.93 68 5.93%
2 HSBC 10,710.61 60 5.71%
3 BNP Paribas 9,831.12 47 5.24%
4 Credit Agricole CIB 9,404.76 44 5.02%
5 Commerzbank Group 9,001.98 53 4.80%

Bookrunners of Global FIG

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 17 Oct 2016
1 JPMorgan 81,231.28 359 6.94%
2 Citi 71,707.01 430 6.13%
3 Goldman Sachs 66,474.43 345 5.68%
4 HSBC 65,008.61 267 5.56%
5 Morgan Stanley 64,563.48 305 5.52%

Bookrunners of Dollar Denominated FIG

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 18 Oct 2016
1 JPMorgan 63,581.57 256 10.75%
2 Citi 59,939.53 336 10.13%
3 Bank of America Merrill Lynch 50,999.42 275 8.62%
4 Morgan Stanley 47,227.84 232 7.98%
5 Goldman Sachs 44,763.52 269 7.57%

Bookrunners of Euro Denominated Covered Bond Above €500m

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 18 Oct 2016
1 Credit Agricole CIB 8,094.29 29 8.24%
2 BNP Paribas 7,155.53 27 7.28%
3 UBS 6,612.03 23 6.73%
4 LBBW 5,728.28 22 5.83%
5 Commerzbank Group 5,651.39 24 5.75%

Global FIG Revenue

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 02 May 2016
1 Morgan Stanley 365.83 497 7.62%
2 JPMorgan 332.66 618 6.92%
3 Bank of America Merrill Lynch 299.89 590 6.24%
4 Goldman Sachs 276.71 375 5.76%
5 Citi 264.54 592 5.51%

Bookrunners of European Subordinated FIG

Rank Lead Manager Amount €m No of issues Share %
  • Last updated
  • 18 Oct 2016
1 BNP Paribas 6,493.74 22 9.59%
2 UBS 6,355.46 25 9.39%
3 HSBC 6,275.95 20 9.27%
4 Barclays 5,430.32 15 8.02%
5 Citi 4,577.05 23 6.76%