Germany's Eurozone Woes

Photo: Santiago Cornejo,

The European Union's debt crisis poses the greatest risk to the disintegration of the Eurozone and has affected most of the countries in it, causing massive unemployment and recession. Despite analyses that Germany has benefited the most from the crisis due to the decrease of its bond yields—as Germany is seen as a safe haven—the country will soon face a dramatic dilemma to stay or leave the currency because of a multitude of factors. The fate of the euro is in the hands of Berlin.

Germany's growth is traditionally driven by a robust industrial export sector, one of the top in the world. Its exports in the E.U. have been steadily dropping due to the recession, and the outlook for a resurgence of consumer confidence does not look optimistic for years to come. In parallel, Germany's public debt is increasing, having reached 82 percent of its GDP. The BRICS, which have contributed to the increase of German exports in the last decade, have seen their growth slow; the United States is unable to pick up the slack; and consequenty the German export machine faces dire straits.

German banking institutions have a tremendous exposure in the Eurozone's banks, companies and governments—804 billion euros in total, some 28 percent of Germany's GDP. As Germany (despite Chancellor Merkel's denials) assumes greater responsibilities for the bailout of Greek, Spanish or Italian banks, Germany's exposure seriously increases, undermining the credibility of the country as a AAA bond investment destination. To make matters worse, France's coming recession, which should be official by the end of the year, will exert even larger pressure on Berlin, and may push Germany into deciding whether the Euro project is worth its weight.

The Ifo Institute for Economic Reserch estimates Germany's 2012 GDP growth rate at 0.7 percent. 2013 projections are at 0.3 percent, barely escaping technical recession. In May 2012, unemployment rose to 6.8 percent, which does not take into account a considerable number of jobholders who are occupied in the so-called mini-jobs, which pay a meager 400 euros per month. According to Deutche Welle, more than 7.3 million people in Germany had this kind of employment at the end of 2010, and since then the numbers have increased. Marginalization of a significant portion of the country's human capital is already pushing the younger generation to extreme right-wing or left-wing exhibitions in urban centers like Berlin.

Germany's external debt has reached more than 145 percent of its GDP. In comparison, Japan's external debt to GDP ratio stands at 45 percent, the United States at about 103 percent. China's is less than 5 percent, Russia 33 percent, as of late 2011. Of all the global players, Germany is most exposed to the dramatic shifts of market forces, which may well test Berlin's financial stability in the not-so-distant future.

Several scenarios could unfold. A negative one would entail a severe economic crisis spreading across Europe, similar to that of the late 1920s. A second option would be for Germany to impose its will on all its 26 E.U. partners by requesting tangible and strategic assets (industrial, commercial and real estate) in exchange for debt guarantees. Or, the European Central Bank, under German guidance, may in effect print euros to buy debt accumulated.

The first outcome would bring about all sorts of political upheaval in Europe that cannot be fully estimated. The second scenario would certainly cause the disintegration of Europe, since it would create a German Imperium in the continent, stirring memories of the World Wars. The third option would significantly devalue the euro, causing an increase in value of the much-needed energy and commodity imports of Germany (valued in USD) while at the same time eroding Germany's financial reserves and stability due to increased inflation.

Germany's wild card

As with previous difficult periods in German history, Berlin may be tempted to enact an "axis" with Moscow that includes the Commonwealth of Independent States as well. A large consumer base, and an import location for energy and commodities along with political and military might, could bolster a decaying Eurozone—in essence a new division of Europe, where Germany and Russia would partner with most of Europe, each one contemplating the other's needs. France's role will be of importance as well, since the direction that Paris takes would either strengthen or weaken the hypothetical German-Russian plans.

Such an alliance may seem far-fetched, but tectonic plates have been shifting since the global financial crisis began in 2008, which may continue to alter the geopolitical landscape, most importantly in Europe. Despite assurances by political figures and supranational institutions, the struggle for survival for countries and financial institutions rages strong, and historic developments should be expected.

View the Worldpress Desk’s profile for Ioannis Michaletos.