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In the millions of words written on Europe s debt crisis, Germanyis typically cast as the wise adult to Greece s profligate child.Prudent Germany, the narrative goes, is loath to bail outfreeloading Greece, which borrowed more than it could afford andshould face the music. Would it surprise you to know that Europe s taxpayers haveprovided as much financial support to Germany as they have toGreece? An examination of European money flows and central bankbalance sheets suggests so. What the widely accepted European morality tale ignores is thatirresponsible borrowers can t exist without irresponsible lenders.Germany s banks were Greece s enablers. Thanks in part to laxregulation, German banks built up precarious exposures to Europe speriphery countries in the years before the crisis. ByDecember 2009, according to the Bank for InternationalSettlements, German banks had amassed claims of $704 billion onGreece, Ireland, Italy, Portugal, and Spain, far more than Germanbanks aggregate capital. In other words, they lent more than theycould afford. When the European Union and the European Central Bank stepped in tobail out the struggling countries, they made it possible for Germanbanks to bring their money home. They bailed out Germany s banksas well as the taxpayers who might have had to support them if theloans weren t repaid. Unlike much of the aid provided to Greece,the support to Germany s banks happened automatically, as afunction of the currency union s structure. Here s how it worked. When German banks pulled money out ofGreece, the other national central banks of the euro areacollectively offset the outflow with loans to the Greek centralbank. These loans appeared on the balance sheet of the Bundesbankas claims on the rest of the euro area. This mechanism, designed tokeep the currency area s accounts in balance, made it easier forthe German banks to exit their positions. Now for the tricky part: As opposed to the claims of the privatebanks, the Bundesbank s claims were only partly the responsibilityof Germany. If Greece reneged on its debt, the losses would beshared among all euro-area countries, according to theirshareholding in the ECB. Germany s stake would be about 28percent. In short, over the last couple of years, much of the risksitting on German banks balance sheets shifted to the taxpayersof the entire currency union. It s hard to quantify exactly how much Germany has benefited fromits European bailout. One indicator would be the amount Germanbanks pulled out of other countries since the crisis began.According to the BIS, they yanked $353 billion fromDecember 2009 to the end of 2011 (the latest data available).Another would be the increase in the Bundesbank s claims on othercentral banks in the euro region over the same period. That amountsto 466 billion ($586 billion) from December 2009 throughApril 2012, though it would also reflect non-German depositorsmoving their money into German banks. By comparison, Greece has received a total of about 340 billion in loans to recapitalize its banks, replacefleeing capital, restructure its debts, and help its governmentmake ends meet. Only about 15 billion of that came fromGermany. The rest is from the ECB, the European Union, and theInternational Monetary Fund. Before Germany s banks pulled back their funds, they stood to losea lot if Greece left the euro. Now any losses would be shared withthe taxpayers of the entire euro area particularly France, whosebanks still have a lot of outstanding loans to Greece. Perhaps thisis what some German officials mean when they say that the euroregion is better prepared for a Greek exit. Ultimately, though, the cost of letting Greece go would come hometo Germany. If bank runs and market turmoil forced Portugal, Spain,Italy, and others out of the euro area as well, the losses couldwipe out much of the capital of German banks, not to mention thelonger-term damage the euro breakup would do to the exports thatdrive Germany s economy. To prevent such an outcome, with or without Greece, Germany willhave to say yes to everything it has so far refused to do, andmore. This would include allowing the ECB to stand behind the debtof sovereigns. The euro area also needs a mechanism that wouldtransfer money to economically troubled countries such as Greecejust as automatically as the region s payment system bailed outGermany an element economists have long said is crucial to makingthe region a workable currency union. As we have advocated, a jointunemployment insurance fund could be a first step toward such afiscal union. The question is whether Germany s leaders will recognize theircountry s obligation to the currency union and act in theircountry s long-term best interests in time to save the euro.We re not optimistic, but we d very much like to be wrong. To read William D. Cohan on big paychecks outside finance and SimonJohnson on a safety board for financial crashes, go to: Bloomberg.com/view . We are high quality suppliers, our products such as Industrial Flood Lighting , Led Rechargeable Flashlights Manufacturer for oversee buyer. To know more, please visits Industrial Lighting Fixture.
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