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The euro rescue package poses incalculable risks

The Local · 21 May 2010, 14:04

Published: 21 May 2010 14:04 GMT+02:00

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The rescue package for the euro passed by parliament on Friday is contrary to German interests.

Analysis by the Ifo Institute for Economic Research at the University of Munich concludes that contrary to some contentions there is no systemic crisis of the single currency the euro. In fact, the euro is still overvalued in terms of purchasing power parity. Its true value lies at around $1.14. Also the inflation rate shows no indication that the currency is in danger, since at a current 1.5 percent it is clearly below the average rate of inflation that prevailed for the Deutsche mark.

It was not the euro that was endangered in the crisis but rather the ability of the European debtor states to continue to finance themselves on such favourable terms as Germany. In addition many banks, in particular in France, have great problems because the market value of their claims against the debtor countries were at the risk of falling further. For this reason the French especially pressured Germany to accept the rescue package.

With the euro rescue package becoming German law, Germany will de facto be assuming the liability for the debts of the other euro states. In addition to the direct budgetary risks, this guarantee has further problematic results for the German economy.

The foreign exchange markets have already realised that with the rescue package the risk for the euro has risen on the whole because now all countries are endangered. Since these measures have been announced, the value of the euro has clearly fallen. Before the decision, the market pressure had instead concentrated on the bonds of the debtor countries.

More serious than the possible burdens from German liabilities are the false signals for investments and hence the expected weakening of economic growth in Germany.

After joining the euro the southern Europeans profited from favourable interest rates and were able to finance an artificial economy boom on credit. Higher interest rates in comparison with Germany would have now ended the artificial boom. This effect will be prevented by the rescue package.

For Germany a mirror image of this argument applies. German savings have been flowing for years to southern Europe and to the US. Hardly any investments were made in the domestic economy and Germany slid into the bottom ranks in terms of economic growth.

Story continues below…

Then the Greece crisis shook confidence regarding the creditworthiness of the debtor countries, which led to a correction in interest rates. For Germany this correction was advantageous, because it was to be expected that a greater portion of German capital exports – €166 billion as of late – would in future have remained in Germany and would have ensured more domestic growth, as we were accustomed to in the pre-euro era.

The new law will prevent this necessary correction, however, will continue to direct capital abroad and will prevent the so urgently necessary investments in Germany. Even with massive tax reductions for investors, we will not be able to prevent this from happening.

The rescue package is an incalculable risk for Germany and is sure to slow its growth.

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Your comments about this article

17:37 May 21, 2010 by William Thirteen
actually just living life on this planet entails incalculable risks! or maybe i just need a bigger calculator....
19:29 May 21, 2010 by michael4096
Ireally don't understand what point that the article is trying to make.

We all agree that the euro is overvalued, that greece spent too much, that the markets are once again manipulating ordinary people to earn fat bonuses. So, what is the point?

Until somebody stops the power a very few traders have over currency fluctuations screwing everybody, what can the world do but say that we are all united in stability?
22:54 May 21, 2010 by Beachrider
I agree with some of the commenters. The base article doesn't evaluate the available decisions, it just criticizes the situation that Germany found herself in. It is NOT a legitimate assessment of what-was-doable when the bailout happened.

I don't know about this organization behind the article. Why would they lend their name to such a story?
15:46 May 22, 2010 by nashv
The article's point is stated in the title. The risks are incalculable due to the large uncertainty in factors. Economic risk analysis 101 tells you that you do not step into a situation whose risk you cannot estimate.

Oh, and I'd surely listen to Dr.Sinn http://en.wikipedia.org/wiki/Hans-Werner_Sinn

and I think it unlikely that the article is 'full of crap'.
18:34 May 22, 2010 by Giza The Cat
As someone who has a collection of old Deutsche Mark coins, could the current Euro crisis mean those old DMs might be worth something again?

My cousin is currently living and working in Germany and he says some of his customers are paying him in USD.

Will the Euro coins soon only be artists' materials? Will people be making jewelry out of them?
18:38 May 22, 2010 by Murdo Mc Sponge
Poor old Germany and poor Germans. You were warned by who you chose to call "Eurosceptics" that the whole dreadful Euro experiment was doomed to run into BIG problems. Did you listen? No!!

So now you have to pay all the bills. Well, bad luck!! You should have listened to the wise advice you were given in at the start, and not believed the hubristic politicians who got you and everyone else into the Euro in the first place.

I won't say the Euro will never work, because I believe, unfortunately for you, that your politicians will go on throwing good money after bad, in order to keep the whole bankrupt show on the road. However, what I will say is that if they go ahead and do that, it will be years - many years - before a) you see your money back. During that time, Germans will pay, and pay, and pay!! You should have done what we Brits did, keep out of the whole awful project.

Yes, and I freely admit that we've got our problems too. We've completely overspent like everyone else. But that's what unfettered Socialism does for you - wastes all your mone. A bit like your politicians are doing!!
21:20 May 24, 2010 by Beachrider
OK, the risks are NOT incalculable, so the title is hyperbole.

The limit of exposure is the limit of the fund. Expulsion from the Eurozone is a way of limiting the exposure much beyond that. The Euro is already getting pounded because some folks believe that expulsion is a forgone conclusion.

I support that folks can argue about collateral damage to expulsion. That damage is also NOT incalculable. Responsible financial foundations simply wouldn't lead with such obtuse characterizations, unless they had an ulterior agenda.

I guess that the keyword 'incalculable' is taking into account the failure of the Euro, in general. With the PIGS numbers that we have seen, there is no reason to expect the Euro to fail.

Please understand that in an English-language European website, it is possible that some readers simply never believed in the Euro. Germany should be careful in taking those positions, right now.
16:56 May 25, 2010 by Edmond Schindler
According to my own shortsighted needs, the current swing up in the dollar vs euro is a welcome change. I can't wait for the dollar to have a greater value than the euro, personally it would allow me to retire here in Germany instead of having to work while receiving retirement benefits from the US just to make ends meet. Before the Euro it wasn't so. Over the last 9 years since the DM was lost times have been very difficult because of the over inflation of the Euro. Happy to see it changing.

Does anyone else feel that way?
22:50 May 25, 2010 by derExDeutsche
I get the feeling that Germans may be waking up to the fact that the Govt. pushing the Euro doesn't necessarily have Germans best interest in mind.

The EU and its inherent corruption is exposed.

Now, like a million times before in history, it is time to subvert the public.

I think you will find many of the subversives and subvertees here on this site.

You can spot them by their Moral Relativism.
00:42 May 26, 2010 by Beachrider
derEx is looking for subversives. The funny thing is that, to such a person, almost anything can be 'subversive'. You just have to be not-in-agreement with someone to have them render you to be subversive. We had the 'McCarthy era' in the USA where this was done to unprecedented scale. It is a complete embarrassment, now.

Germans have to take care of the Euro. Their leadership is key at this time. The French, Italians, Spaniards, Dutch, etc. are looking to see if Germany is ready to lead. The English and the Swedes could feel very self righteous, but they will get caught in any Euro-thrashing (to a lesser degree).
03:01 May 26, 2010 by derExDeutsche
Beachrider is looking for McCarthy-ists. The funny thing is that, to such a person, there is no FACT that can't be subverted.

In Germany we've had Nazi-ism Communism, WWI and WWII. Socialism and Nationalism, along with a select few others. Needless to say, to an unprecedented scale. A COMPLETE EMBARRASSMENT, now.

If Germans take care of the Euro, expect either complete collapse or drastic reduction in living standard within the next 5 years. The leadership is holing onto a sinking ship. Are the German public stupid enough to join them? I don't think so.

Its not just England and Sweden, a lot of us are going to be laughing all the way to the bank.
16:17 May 26, 2010 by Beachrider
derEx is passing the 'duck test' for a McCarthy-ist. So I will be forgiven if I take note of it. I don't get how derEX says that I started feeling that subversion-is-everywhere.

I would concede that the Euro contrasts the Dollar in that its governmental-counterpart is larger and much more diffuse. If the Euro is to continue, its diffuse governmental components have to be able to organize for this kind of issue. I doubt that the ECB would politically survive another spate of these problems UNLESS they have some governmental-support.
11:32 May 27, 2010 by Prufrock2010
Schindler --

I am in complete agreement with you, as I am in a similar situation.
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