Hello fellow personal finance readers. I go by the pen name “Teacher Man” due to the fact that I recently graduated from university and am in my second year of teaching high school. About 9 months ago my partner and I started a website called My University Money. It is aimed at helping young people (with a specific focus on post-secondary students) and just talking about financial and student lifestyle issues in general. Young & Thrifty was one of the first bloggers to really reach out to us and give us a little recognition when we were just starting off. When I read that Y & T was hitting a busy patch in life I offered to do a little staff writing for her, and she graciously accepted. Hopefully you readers don’t notice THAT much of a drop-off from the typical high quality posts you’ve come to enjoy here!
So if the Eurozone is all one big happy family, then Germany has got to be either the stern and conservative father, or the overachieving big brother. There is no shortage of screw ups in this family either. At first, it wasn’t too bad when the little guys were having problems. After all, cute little Ireland decided to take most of their medicine on their own, and who doesn’t want to help those feisty little leprechauns (sorry if this is offensive Irish peeps, I just always think of Notre Dame when I think Irish). But now the older brothers and sisters have been spending way beyond their means, and it’s quickly becoming apparent they should have got their hands slapped a little more when they were young, because now they would rather throw temper tantrums (*ahem* Greece rioters *cough cough*) than try to change. If we take this analogy to its logical conclusion, I guess France would be the mother that is trying to help, but has been using her credit card a little bit too much as well. This is basically what the European debt crisis has boiled down to. Despite all the numbers and rhetoric you hear about on TV, it is becoming more and more apparent that the overall health of the Eurozone will ultimately be determined by whether Germany wants to take care of everyone, or burn the place to the ground. That’s because this time around, good ole Uncle America and the rest of the developed world extended family is going through some tough times as well, and needs almost as much help themselves.
Tough Love or Hand Holding?
So what do you do if you’re Germany? What do you do with that bratty little brother Greece who says he desperately wants to remain in the family, but whose citizens riot at the mention of the measures that must be taken in order to make the country solvent again? What sort of help can you give to your other family members such as Italy, Spain, and Portugal? These guys are too big to all hold up at once. Would you as a German tax-payer, who has been relatively conservative with your money, help the rest of the Eurozone out? There are basically two main options from what I can tell.
Do the “Mature” Thing
The first line of thinking says that Germany would be better off in the overall economic picture by helping stem this debt contagion, and helping Greece and Italy balance their books. If these countries take major hits to their bonds, there is no question it will cripple Europe’s ability to raise capital for at least a decade. There is also a good chance that the French banks would fall, and unspeakable direct damage would be done to the German economy, but this wouldn’t even be the worst of it. Germany has built itself an enviable position of being an exporter of high-quality manufactured goods. It has benefitted immensely from the Euro and the open flow of goods within the continent. When an exporter’s consumer base just dries up, it doesn’t bode well for long-term growth, and the death of the Euro as a currency would take years to recover from.
Or Cut Thy Nose To Spite Thy Face (That Nose Had It Coming)
Then there is another, more interesting (in my opinion) stance. Basically there are many Germans out there who want to effectively say, “Screw it, it’ll hurt us, but these little brothers need to wise up, take their licks, learn their lesson and move on. If we keep bailing them out every time they get into trouble, they will never learn!” I can definitely sympathize with this (I’m a big brother… who would’ve guessed?). The phrase that people in the financial world throw around when discussing big bailouts is “moral hazard.” The idea is that if someone knows there will ultimately be no consequences (and this has been proven), then what’s to stop them from repeating the behaviour? You have to think that there are some days when Germany asks itself why it didn’t stay single like cousin England, despite the benefits it enjoyed for a time. I can only imagine the righteous anger that German people feel when they watch TV and see Greek unions protesting despite the fact that the government is beyond bankrupt (probably states like North Dakota, who had small banks, and small government, felt something akin to this when they were asked to bail out the big banks that are headquartered in New York). Relations between the Euro crew can be tension-filled at the best of times (and you think you’ve had fights in your family…), so this has to be a really tough pill to swallow for the Germans.
Debt Is Thicker Than Water
I’m sure that in the end the Germans will do the politically and economically smart thing and bail the other guys out. It doesn’t really matter if they do it through raiding their tax payer coffers to raise money for an “emergency fund” or through the issuing of Euro bonds that the Germans will ultimately be on the hook for (these would allow all of the Euro countries access to more cheap credit based on Germany’s good name… just what they need right?). The opposite path, while morally appealing, is too economically terrifying to truly consider. What kind of voluntary “bond haircuts” would European banks have to take? Would that be the end of any liquidity in Europe for years? All I know is that the USA is lucky they have a cool little brother (that understands bank regulation and has natural resource money) like us Canucks!
Y&T's input: It's nice that Canada is regarded as one of the top countries for a safe and effective banking system. We're so used to being the underdogs!