Wednesday, September 14, 2011

German Constitutional Court Accepts Eurozone Bailout - Of Course

German Court Rejects Challenge to Eurozone Bailouts
On September 6, 2011, the German Constitutional Court reached the decision to reject the challenge posed by six prominent German Eurosceptics to Germany bailing out Eurozone countries. The bailouts shall be subject of course to German parliamentary approval. 

As the BBC article states, the German decision has implications for the whole region in light of that fact that it is the largest economy in the entire region. 

Not a Surprising Ruling
To those who have a good understanding of Germany's national interests, this ruling should come as no surprise. In fact, what has just been decided, is that the German Parliament shall essentially decide the future fate of the Eurozone, in absence of (or possibly in advance of) strong and well-organized EU-wide Eurozone stability measures. This means that the German Parliament may come into a position to decide the terms of not only future bailouts, but also of the wider economic infrastructure of the Eurozone. Indeed, as Constitutional Court President Andreas Voßkuhle was quoted as saying "this is not a blank check". This means that German politicians may even come to dictate national-level economic policy guidelines for other Eurozone member nations. 

In other words, this ruling is really a question of German national interest.

Why This Makes Economic Sense
Aside from reasons of control and regional influence, there are concrete economic reasons why Germany would be interested in maintaining the Eurozone, even at the cost of bailouts. In light of the Eurozone, The following facts must be realized. 

1: Germany, is the world's second largest exporter. That is, Germany is an export-dependent economy. This is particularly the case for the industrial and manufacturing sectors in Germany.

2: The presence of the Mediterranean-area member-states brings down confidence in the euro as well as in the stability of the Eurozone. This causes prices for the Euro to be lower than what they otherwise would be. Moreover, this is achieved without interference in the currency markets of any kind. 

3: Having an undervalued currency means having under-priced exports. This is good for German exporters. Its quite straightforward really. Nevertheless, the traditional method of achieving this - devaluing the currency on international markets - is now considered to be a beggar-thy-neighbor policy. This means that while such a policy has worked for Japan in the past and works for China today, it might bring Germany afoul of international trade (WTO) law. Therefore, another mechanism is needed. Preferably one not elaborated in the law, and which would be beyond the reach of Germany's major trade competitors for emulation purposes as well. The common currency is perfect for that. 

German Export-Led Growth Needs the Euro
In light of the troubles in the Eurozone, and the decline of international confidence in the Euro, German GDP growth has recovered in 2009-2010, lead by strong export figures, which have also influenced the growth of the German DAX since 2009. 

German exports are the main source of German GDP growth. Both of these figures have been on the rise since 2009, while the Greek sovereign debt crisis marched onward and confidence in the Euro as well as in the stability of the Eurozone languished.

In 2009 and 2010, this relationship was also reflected in the performance of the DAX. While the Eurozone was suffering a crisis of confidence the DAX saw a strong post-crisis recovery. 

While it is indeed true that the DAX has seemed rather unstable in the last month, this is only because the markets have begun to signal that the bailout is simply taking too long and it does not have the support of the people on the street in Mediterranean Eurozone countries because of the austerity. Furthermore, on September 14,  researchers at the  Institute for Economic Research Halle (IWH) identified lack of political as the key economic threat. "Due to lack of political support from the Member States there no longer seems impossible that the institutions that currently guarantee the stability of financial markets in the euro area no longer can fulfill their role so that the European financial system falters again.
About the Author:
Max Berre is an economist who has worked as a sovereign debt expert at the Inter-American Development Bank in Washington and has taught financial economics at Maastricht University in the Netherlands

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