I have been saying for some time now that Germany is concerned about its own public finances. So it is good to see that Angela Merkel is now confirming this. According to the Telegraph, Merkel believes that Germany simply doesn’t have the economic strength to launch a stimulus package to counteract the austerity now ongoing elsewhere in the periphery. This is significant because it drives not just the adjustment process in Europe but also the perceived need for bail-ins and private sector involvement.
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In sum, I believe we are not going to see any stimulus from Germany. The Germans understand EMU means a loss of fiscal space due to the ECB’s independence. And so the Germans are not going to relax their fiscal stance for fear of the consequences. That means the periphery must adjust via internal devaluation and gain competitiveness externally i.e. with respect to trading partners outside the euro zone via wage and price cuts. Moreover, Germany’s fiscal position means that Cyprus is just the beginning. Any systemic weakness in banking is likely to be met with stringent private sector involvement mandates that will see subordinated bank debt holders lose a lot of money. The question will only go to how senior debt and uninsured deposits are treated. And the answer will be made on a case by case basis with a view to the political circumstances.
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Merkel: Germany ‘too weak to withstand more stimulus’ originally appeared on Credit Writedowns
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