Europe’s Biggest Election: Part 2 – Germany and the Rest of Europe

There’s an important election coming up on 22 September. Germany goes to the polls and everyone’s expecting current Chancellor, Angela Merkel, to be reinstated. If you didn’t catch my previous post, click here to get a quick primer on the election and the parties involved. Regardless of where the votes go later this month, there are several policy steps that Germany will have to address in 2014 regarding its European neighbors: bonds, bailouts, and banking unions.

Bonds – or more correctly, debt mutualisation. Right now, every member of the European Union issues its own debt, denominated in euros. If Germany needs money, Germany issues bonds. If France needs money, France issues bonds. If Greece needs money…well, that’s more appropriately covered in the next section. Debt mutualisation is the idea that Eurozone debt could be amalgamated and the burden shared among all EU members. The benefit would be that stronger members could help shoulder the burden of the weaker members. The primary drawback is that stronger members would be required to help shoulder the burden of the weaker members. As you can imagine, debt mutualisation is more popular with the weaker periphery. In Germany, the idea is seen as rewarding profligate behavior.  Both the CDU/CSU and FDP (see previous post for details on the parties) are pretty strongly against any sort of pooling of Euro-debt. That said, the rest of Europe will probably keep pushing the issue.

Bailouts – or more politically correct, treatment of peripheral sovereigns. Greece and Portugal need money, but their ability to issue their own debt is hampered. So they require capital injections from their European cousins. While most of the major German parties are pro-EU, there’s a distinct case of bailout fatigue setting in among the German public. Any future assistance to the struggling EU members will have to be handled delicately with regards to the German electorate. A government elected with a strong majority will be seen as having slightly more latitude with which to act.

Banking union – or as the Germans would prefer to call it, a limited banking union. Europe needs something similar to the Federal Deposit Insurance Corporation (FDIC) in the United States – an institution that can resolve failed banks, provide supervision to all European banks, and help guarantee creditors that their money is safe. Germany prefers a limited version of this plan, and insists that changes are needed to various EU treaties. The issue has been put off for long enough and will likely need some progress in 2014, if not before.

The problem with each of these issues is that all of Germany’s major political parties are hemmed in by two opposing poles in German public opinion. On the one hand, Germans are generally pro-European; it’s arguable that no one gains more economic benefit from the EU than Germany. On the other hand, German’s are tired of “footing the bill” for the likes of Greece and Portugal; this is the bailout “fatigue” that’s mentioned in the press. To a great deal, the effect of one is to mostly cancel out the influence of the other. Unfortunately, this likely means that there won’t be any drastic shifts in Germany’s approach to the Eurozone crisis. Not the outcome everyone is really hoping for when “muddling through” has only gotten the Eurozone so far.

 

The information in this article has been derived from sources believed to be accurate.  Information derived from sources other than Principal Global Investors or its affiliates is believed to be reliable; however, we do not independently verify or guarantee its accuracy or validity.

The information in this article contains general information only on investment matters and should not be considered as a comprehensive statement on any matter and should not be relied upon as such. The general information it contains does not take account of any investor’s investment objectives, particular needs or financial situation, nor should it be relied upon in any way as a forecast or guarantee of future events regarding a particular investment or the markets in general. All expressions of opinion and predictions in this document are subject to change without notice.

Subject to any contrary provisions of applicable law, no company in the Principal Financial Group nor any of their employees or directors gives any warranty of reliability or accuracy nor accepts any responsibility arising in any other way (including by reason of negligence) for errors or omissions in this article.

Links contained in some blog posts may take you to third-party sites and Principal Global Investors makes no guarantees to the accuracy of the information provided.