To Bail Out or Not? Germany, “Madame No” and the Euro Crisis

Notes internacionals CIDOB, núm. 63

Four years into the Eurozone crisis two things become increasingly clear: Simple austerity measures do not work and German support for bailouts in the Eurozone is key. If political consensus in Germany for such bailouts wanes, the Eurozone will break up, if austerity measures in southern member countries continue unabated, economic deterioration and political resistance will lead to a breakup as well.
Redressing imbalances within the Eurozone and restoring growth perspectives in its south is essential for a survival of the Eurozone. During the first decade of its existence up to the global financial crisis in 2008, Germany and the Netherlands amassed increasing current account surpluses, while the rest of the Eurozone mostly did the opposite.
The question of bailouts has shifted from the if to the how. Southern partners in the EU ask for more than the steps the Merkel government has taken, like Eurobonds. Germany on the other hand is anxious to avoid a transfer union without political controls and it wants to avoid liability of German taxpayers for legacy problems of southern banking systems.
Due to a higher multiplier effect of state spending, declines in spending are overcompensated by declines in GDP. Austerity can mean pain without gain. At the same time stimulus is impeded by unsustainably high debt levels. It is increasingly acknowledged that deficit reduction needs to be stretched out in time and certain levels of spending maintained, especially in areas that are crucial for growth like investments or research.
The costs of a Eurozone breakup would be astronomical and would also affect Germany and other net payer states. Yet a continuation is only conceivable with increased economic convergence and some form of fiscal union for which considerable political resistance exists.

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