The German trade surplus and our grand rescue of the German banks.

The forced bail-outs of Ireland and others, is often framed as loans handed out to the irresponsible Eurozone peripheral member states by rich, responsible countries like Germany. They came with very harsh conditionality attached, but their aim was nonetheless to help the recipients!

In the years that followed the introduction of the euro, Germany developed an increasingly large current account surplus, while peripheral countries saw their current account deficits soar – Ireland being an exception. This was due to a number of reasons, such as Germany’s decision to pursue an aggressive policy of wage moderation – the Hartz IV reforms – which, among features, emphasised the export sector as the main motor of the economy.

Within a monetary union the surpluses of certain countries are mirrored by the deficits of others. It is economically impossible therefore, for all member states to be in surplus unless the Eurozone as a whole runs a constant trade surplus with the rest of the world. Countries that register a current account deficit – meaning that their imports exceed their exports – have to import capital from foreign countries to finance their deficits.

The build-up of debt in the peripheral countries of the periphery was caused by an accumulation of mostly private – not public – debt. The banks in these countries borrowed huge amounts of money from foreign banks, encouraging massive debt-fuelled booms, while earning the foreign banks a tidy profit.

Most of this money flowing into the periphery came from the banks of just four countries: France, Germany, the United Kingdom and Belgium (in that order). German banks alone had loaned $720 billion to Greece, Ireland, Italy, Portugal and Spain by the end of 2009 – much more than the German banks’ aggregate capital!

The trade surplus ensured that there was plenty of money sloshing around in German banks. Two of Germany’s largest private banks, Commerzbank and Deutsche Bank, together loaned a massive €210 billion to these countries. Irresponsible borrowing was made possible by irresponsible lending. The result was that consumers in periphery countries were able to import an ever-growing amount of German goods, leading to a dramatic increase in the country’s trade surplus. Germany, in effect, self-financed its own so-called economic miracle.

Following the US subprime crash, German banks found themselves dangerously exposed to the banks of the peripherals. If they failed, the Germans would have suffered huge losses and bank failures and the Euro would, most likely, have collapsed in the aftermath. However, between 2008 and 2009 member state governments committed €3 trillion in guarantees of various types to bail out their over-indebted banks and their creditors. In Ireland, this happened under direct pressure from the ECB, which within a few months was advocating that other member states follow suit.

This allowed Ireland’s creditors, which included Allianz, Credit Suisse, Deutsche Bank, Goldman Sachs, HSB and Société Générale, to safely exit their positions, while leaving the people of this country saddled with a colossal debt that by 2011 had surpassed 100% of GDP, up from just 25% in 2007.  Of course, Ireland wasn’t the only country to see its public debt go through the roof as a result of bailing out its banks and in the process, their creditors.

Ireland, became the first country to exit a troika ‘rescue’ program, and has been sold as a success story by the EU’s political elites. However, a study by Attac Austria found that while Ireland received €67.5 billion in bail-out money since the end of 2010, funds amounting to €89.5 billion were transferred from the country to the financial sector during the same period. €55.8 billion went to creditors of the Irish state – including German and other core country banks.

Germany’s former Finance Minister, Wolfgang Schäuble, stated that ‘Ireland did what it had to do, and now everything is fine.’ But the only ones who are fine are the European financial elites. It was the banking sector that was rescued, not the Irish people.

The report is especially critical of the troika’s decision to force the nationalised Irish banks to repay all their creditors, including those not covered by the state guarantee. As mentioned already, the ECB – our ‘friends in Europe,’ forced the Irish government to take this step by threatening to withhold emergency funding from Irish banks. This was done even though the full repayment of unguaranteed bonds is not part of the bail-out memorandum and despite the IMF’s advocacy of a ‘haircut’ for these bondholders.

The report concludes that ‘Through blackmail and coercion, the ECB ensured that after five years of bank bail-outs, speculators are handed another €16 billion of public funds’.

By September 2008, the month of the bank guarantee, Irish banks owed their German peers €135 billion. So it is quite realistic to see the bail-out of Irish banks – backed initially by the Irish taxpayers, and then by the ESM – as effectively a back-door bailout of reckless German lending. It took our German and other creditors off the hook, while sending Irish public debt levels through the roof. If lenders in Ireland were allowed to default, the consequences for the German banking system and the Euro would have been very serious.

Greece is another case in point. At least 77 per cent of the €200+ billion disbursed by the troika as part of the first two ‘rescue packages’ went to the country’s banks (€58 billion) and creditors (€101 billion), mostly foreign banks and investment funds. Only €43 billion went into the national budget. At the same time, more than €34.6 billion were yet again paid to creditors as interest payments for outstanding government bonds.

The EU pointed out that it was the Greek population who benefitted from the so-called “rescue packages,” but that was plainly not the case. Instead, they were the ones paying for the rescue of banks and creditors by suffering from a brutal regime of austerity and its catastrophic social consequences’.

Germany also benefited from a more subtle form of bail-out by its EU partners, in what amounts to yet another shift in liabilities from banks to taxpayers. Because of the way in which the eurozone’s TARGET2 interbank payment system works, when German banks pulled money out of Greece, the other national central banks of the EMU collectively offset the outflow with loans to the Greek central bank. These loans appeared on the balance sheet of the Bundesbank, Germany’s central bank, as claims on the rest of the euro area.

This mechanism, designed to keep the currency area’s accounts in balance, made it easier for the German banks to exit their positions. The Bundesbank’s claims were now only partly the responsibility of Germany. If Greece defaulted on its debt, the losses would be shared among all euro area countries, according to their shareholding in the ECB, and Germany’s stake would be about 28 per cent. As a result of this, Germany succeeded in reducing its exposure to Greece by almost 80 per cent between mid-2010 (when Greece entered the first ‘rescue programme’) and mid-2012. Ireland’s capital subscription to the ECB is 1.38% which means we could have been hit for €1bn+.

One of the consequences of the flawed architecture of the eurozone is that all Eurozone member states have effectively bailed out the German banking system from the credit risks accumulated as a result of the country’s persistent trade surplus. As Theo Waigel, then German Finance Minister said back in 1996, “The Euro must speak German,” and it does!