Fear. In different times greed is just as important. But right now, and across most of Europe, fear is the key driver. Money sloshes around, and all that those who control it want to do is limit the downsize. They are trying to mitigate against fear. And so afraid are they, that at times they have put money in assets that give negative interest rates, just to feel safe. This has been rather good news for Germany, because while fear has driven money away from Greece and Spain and co, making the government cost of repaying debt in these countries seem prohibitive, in Germany it has been quite different. Fear has boosted Germany coffers. And a new report tells us that the boost has been dramatic. This is why.

The euro crisis just won’t go away. In Germany they are sick of it too, and with good reason. Germany has done nothing wrong. Its work force has worked hard, saved for retirement, and what is wrong with that? Yet they are being punished; they are told that to atone for their sins of working hard and saving for the future, they must pick up the tab for indebted Europe. Yet, there is another way of looking at this, according to data produced by Germany’s own finance ministry, because the country has made a tidy profit from the euro crisis.

It all boils down the fact that money has to go somewhere. Corporates are saving. Across much of Europe, households are saving. Where does the money go? One thing is for sure, putting it in Greek bonds is risky. Spanish, Italian and Portuguese bonds don’t seem much safer either. But German bonds, in contrast, feel as safe as a safe house in a land with no crime.
In fact so safe are German government bonds or bunds, perceived to be, that there have been times when the yields on some of them have been negative.
So actually, Germany has done rather well out of fear created by the euro crisis – or should that be the other way around – a euro crisis created by fear? But can we put a number on how well?

German Social Democrat Joachim Poss wanted to know how much, and, as a man in power, he got an answer. The Germany finance ministry responded to Poss’s question by getting the abacus out and making some calculations. The ministry took its estimate for interest payments on its debt, and subtracted from that the actual interest. From its calculations it drew the conclusion that between 2010 and 2014, it will save 40.9 billion euros thanks to interest rates being lower than expected, which is thanks to money flooding into German bunds for the sake of safety.

This is a rather important point. Right now, Italy is posting a primary budget surplus, meaning its government is spending less than it receives before deducting interest on debt. If it was paying the kind of interest on debt that the German government pays, Italy would be close to being in surplus.
And that in a nut shell is the case for euro bonds; that is to say for all countries in the euro area to raise money by using the same bonds, backed by each and every government. You can see why Germany does not like that idea, but then again, a monetary union with one central bank controlling monetary policy, cannot really work unless governments pay the same interest on their debts.

But the data relating to German savings on its debt does not tell the full story. The fact is that German exporters, the drivers of its economy, have done well out of the euro for another reason. If Germany still had the Deutsche mark, the currency would surely have risen sharply in recent years. By sharing a currency with the likes of Greece, Germany has enjoyed a massive terms of trade benefit.

So actually, for Germany there have been plenty of upsides to being in the euro, which is why it is right that it pays for the downsides too.

© Investment & Business News 2013