Are the Germans coming to the table?
Throughout the Euro-zone crisis the question has always been, “Will the Germans be willing to support the smaller countries like Greece and Portugal” Just as in 1789 the key to the fledgling American republic wasn’t Delaware and Rhode Island, but Pennsylvania, Virginia, and New York, the key to the stability of the European experiment isn’t the peripheral countries, but the core: Germany and France.
And getting the Germans to agree to a closer fiscal union has always been the main issue. “What do the Germans get out of the Euro?” is a legitimate question—because it’s not rational to expect a sovereign state to agree to something that’s not in its interest.
But the Germans get a great deal out of the Euro: their economy is highly export-dependent, and they have a much larger market for their goods; their economy is highly capital-dependent and the Euro gives them deeper and more liquid markets than would be possible with the Deutschmark; and their economy is much more competitive with a weak Euro than it would be with a super-strong Mark. (That’s one reason the Swiss have pegged their Franc to the Euro.)
Recent reports indicate that Germany is willing to lift its objections to common Euro-bonds or mutual support for European banks if other countries are willing to give up control on bank supervision and some fiscal tax and finance policy. But getting and spending is close to everyone’s heart, and we can expect populist push-back, just as the US saw in the 18th century—and sees now.
The key is flexibility. Sovereignty of contract is the mother of revolution, as Europe learned to its sorrow in the 1930s. Now as then, the world will be watching.
Douglas R. Tengdin, CFA
Chief Investment Officer
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