In Spain, Germany is villain, not savior

June 4, 2012

MADRID – What brought me to Spain during the most threatening week of the country’s recent history was an invitation to speak about one of Europe’s darkest hours a half-century ago, pegged to the Spanish-language publication of my book Berlin 1961: Kennedy, Khrushchev, and the Most Dangerous Place on Earth.

One of Spain’s most senior government officials was quick to make the connection between 1961, when Germany’s postwar division was deepened by the Berlin Wall, and the historic moment today, when a reunified Germany, acting from its most powerful European perch since the Third Reich, will determine whether the continent will be newly divided – this time along North-South lines, with Spain outside the euro. But more sharply, this official – who won’t speak for attribution as he must deal daily with German counterparts – believes Germany’s actions (and, more frequently inactions) have put the euro and the European Union project itself at risk.

It is in that context, he said, that Spain has put forward an urgent plan for a European banking union, complete with a pan-European deposit guarantee fund and banking supervisor. The idea has now been endorsed by the European Commission, European Central Bank President Mario Draghi, Italy, Ireland and others. German Chancellor Angela Merkel has not followed suit. Spanish officials are lobbying hard for this idea because they believe it’s urgently needed, but also because they hope to force Germany’s hand in a manner that would move markets and reverse Spain’s downward spiral. So that his purpose couldn’t be missed, Spanish Prime Minister Mariano Rajoy over the weekend surprisingly called for centralized control of national budgets in the euro zone – teeing up a crucial auction of Spanish treasury bonds this Thursday.

Yet Rajoy’s top economic advisers say that whatever they may do themselves, it is beyond them to remain in the euro if markets aren’t more convinced of Germany’s commitment. Although Rajoy’s government has reduced pension burdens, introduced labor market reforms, recapitalized banks, cut deficits and written debt limits into the constitution, markets continue to bet against Spain. Ten-year sovereign bond yields, at more than 6.5 percent, are 550 basis points higher than those in Germany and perilously close to the 7 percent levels at which Portugal, Ireland and Greece required bailouts.

In many respects, Spain has already been forced out of the single market. Most Spanish issuers and companies can no longer access funds from outside Spain, which had long been one of the biggest benefits of the euro zone. The euro’s exchange rate remains strong only because investors are fleeing to Germany as a safe haven, wagering that appreciation could be 40 percent if the Germans leaves the euro.

If global investors were certain Spain would remain in the euro, its assets would look cheap, capital flight could be contained, and new investments would flow. For the moment, however, investors are hedging against a Spanish departure from the euro. Even today’s discounted prices look high, then, as they reckon “the new peseta” would come with a minimum 30 percent depreciation.

One conversation after another in Madrid underscored a growing Spanish resignation that their fate rests in German hands and an escalating frustration that German leaders have been too slow to recognize the economic stakes, the historic moment or what steps could most quickly save the euro project.

Spanish experts list the many things German leaders could have embraced in past months that might have produced a different outcome: euro zone bonds, an expansion of funds available from the European Stability Mechanism (currently 500 billion euros) and the ability of banks to access them directly, a more expansive European monetary policy or a Europe-wide guarantee for the threatened banking system.

The failure of the Germans to act with the urgency and scale other Europeans consider necessary has led markets to believe, along with more than a few Spaniards, that Germans themselves may no longer think the euro was such a good idea and that it may be time to cut their losses. That notion has been dramatically fed by the new publication of former Bundesbank director Thilo Sarrazin’s best-selling book, Europe Doesn’t Need the Euro.

A survey in Germany’s Focus magazine last week, which got wide notice here in Spain, showed that while 45 percent of Germans agree with Chancellor Merkel’s view that a euro failure would lead to a broader European failure, nearly the same number, or 43 percent, embrace Sarrazin’s opposing thesis. (Twelve percent are undecided.) Indeed, a rumor is swirling around Madrid that the Germans are already secretly printing Deutschemarks. Although this has no apparent basis in fact, it does reflect the mood.

This growing distrust of German intentions in Spain – a country that has been among of the most welcoming toward Germans, who vacation here in droves – is worrying and expanding. The increased resentment is captured by a history lesson one Spanish business leader says he would like to give Germans, but he won’t do it on the record for fear it would hurt his German business.

First, he said, national division was the price Germany paid for misery it exacted upon Europe. Second, he continued, giving up the Deutschemark and monetary sovereignty was the price for German reunification after the Cold War. Thus, he said, Germany’s historic responsibility must be above all to save the euro, as its creation marked the ultimate European reconciliation and end to World War Two.

“If Europe blows up [because of the Germans],” he asks provocatively, “are we authorized to say Germany should be divided again?”

Spaniards know the euro zone may have been a flawed construction, so they are eager to change it. And they realize it will take years to unwind their debt binge, leaving them owing foreigners 1 trillion euros, or about 90 percent of GDP (though they remind Germans that Spanish profligacy was fueled by euro interest rates set too low for Spain but just right for Germany’s then-stagnant economy).

Yet the Rajoy government now acts with full knowledge of the moment. If Spain leaves the euro, it would be a setback of historic dimensions. The country would overnight go from being an integral part of the world’s largest economic market – to again being a second-rate European player.

Spaniards are convinced Germany would lose even more, in exports, in global position, and in the many unpredictable reverberations of the euro’s unraveling.

Yet until they see a more convincing German response, Spanish officials brace for the worst even while lobbying Berlin and Brussels with the intensity of the damned.

PHOTO: Spain’s Prime Minister Mariano Rajoy looks at his nails during the XXVIII Meeting of the Economic Circle “Cercle D’economia” in Sitges, near Barcelona June 2, 2012. REUTERS/Gustau Nacarino


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Meanwhile in Germany, Spain is the villain.

Posted by Cranios | Report as abusive

Germany should stop bailing out other nations. It is past time for them to support themselves. Either that or go bankrupt.

Why should Germany support the rest of Europe?

It is stupid. It is not good for Germany or the other nations.

Posted by ALLSOLUTIONS | Report as abusive

Be very clear here. Germany makes TONS of money because of the Euro. IF the DM was still around, the price of German exports would be reflected in a very, very high currency, and Germany’s exports would literally suck.
The problems in the Euro zone depress the currency, so German exports are very, very cheap.
This is a de facto transfer of wealth from struggling countries in the Euro to Germany when they buy German exports, and having to compete with Germans when exporting stuff, as well!
Germany makes hundreds of billions of extra profit because of the Euro. The first thing that would happen if the Euro breaks up is Germany’s currency would ratchet up to levels that would crush its export business.
Germany needs the Eurozone to keep its profit up. When and if it falls, Germany is going to have major problems, because it doesn’t have the internal consumers to maintain its own economy…the exact same problem now facing China. China has kept its growth through currency manipulation and keeping the Yuan low…Germany does the same thing with its neighbors keeping the Euro low.


Posted by REDruin | Report as abusive

The Germans are now the sleaziest Money Changers in the world.
It is high time for German Banksters to get their arses out of southern Europe while they are still ahead.

Posted by GMavros | Report as abusive

Let them sell more war machines to Israel.

Posted by GMavros | Report as abusive

Not just in Spain.

Posted by TobyONottoby | Report as abusive

countries that accept some belt tightening (dont want to call it austerity) should be rewarded. it has to work the alternative is to spend spend. Ireland, Spain should fare better with interest rates over say Greece

Posted by thoma | Report as abusive

Maybe Spain is one of many countries to work out that the have nots can no longer bail out the haves through the government treasury.
Let the rich pay there taxes like the poor and spain would not need anyone.
franco liked germany

Posted by hoboturkey | Report as abusive

an idiot piece from frederick, hiding behind anonymous sources to mask a ventriloquist act to articulate his own opinion

completely missed the point that spain cannot be the exception to ireland and portugal regarding scrutiny to access cheap money

merkel has offered a way forward to eurobonds, but frederick has laid out the argument for us why simply taking german money won’t work

and the gaffe in referring to rumours of printing deutschmarks – pitifully lame

like reporting graffiti written on toilet doors

Posted by scythe | Report as abusive

Oh for god’s sake. Now we’re going to start a rumour that Spain is leaving the euro …which will lead to a further deterioration of the Spanish bond market. Just shut up. This is ridiculously irresponsible journalism. But why would you care- you’ll get paid for stupid ignorant speeches that the hedge fund meisters will listen to. Round & Round we go.

Posted by spiderbite | Report as abusive

Well, the author exaggerates Spanish structural reforms. A Spanish worker on a permanent contract still gets 33 weeks of severance pay per year worked if he laid off. So 5 years gives the work 165 weeks of severance pay. That ridiculous. As structural reform, I consider that a joke.

Posted by RoderickB | Report as abusive

Germans do not want to pay for European mistakes,but Europeans have had to pay for Germany’s idiotic and delusional empire building ambitions that led to two wars that devastated Europe and Germany itself. And having been the recipient of the Marshall Plan, Germany did not mind having dollars flowing into its devastated economy as a result of its attempts to grand land and make other European slaves. If Germans do not want to pay then let them pay for the war damage that their country caused to millions of Europeans. If they do not want to have people bring up this despicable period of German history then they should try to be more creative and humble. Merkel is just positioning herself in front of the masses. I bet that if the winds shift and Germans realize that they have more to gain by being part of an integrated europe with all its faults, she will be left dangling in the heap of history as a leader lacking vision.

Posted by ofilha | Report as abusive

I’m so sick of all you people clamouring for germany to pay more war reparations. Why don’t the allies pay reparations for the 5 million soviet defectors who were forcibly repatriated back to russia to be executed by stalin? Or for the 9.3 million germans starved to death by allies policy post ww2? Grow up, it was 70 years ago, atrocities were committed on both sides.

Posted by sucram497 | Report as abusive

I’m so sick of all you people clamouring for germany to pay more war reparations. Why don’t the allies pay reparations for the 5 million soviet defectors who were forcibly repatriated back to russia to be executed by stalin? Or for the 9.3 million germans starved to death by allies policy post ww2? Grow up, it was 70 years ago, atrocities were committed on both sides.

Posted by sucram497 | Report as abusive