Here’s an interesting coda, and/or reality check, to recent attempts at predicting the ultimate fate of the eurozone amid Europe’s sovereign debt crisis.
Germany really can’t leave the single currency even if it wanted to — and hasn’t been able to for a while, as its banks’ assets show fairly well.
On those German bank assets, Barclays Capital’s Thorsten Polleit observes:
…German banks have been accumulating significant exposures vis-à-vis foreign banks and non-banks in recent years, largely within Europe. This has been driven by a lacklustre domestic credit market and, in particular by the ‘New Economy’ boom in 2001, when German banks increasingly sought profit opportunities in foreign markets.
Which is really all about the Bank-Asset-Bergs. These also received a boost in 2001 when state guarantees for the country’s Landesbanken were abolished, with a five-year adjustment period for lending. This led them to look for high yields abroad — including a dalliance with US subprime assets in 2006 and 2007.
Fast forward to 2010. As BarCap’s Polleit continues:
In this context we note that in Q1 10 German banks’ claims (or debt exposure) were €28.6bn on Portugal, €29.1bn on Greece, €115.0bn on Italy, €127.7bn on Ireland and €149.8bn on Spain.
Which is best shown in a couple of Asset-Berg charts (click to enlarge):
This would make German extrication unpleasant — at the very least — for all concerned, and gives some context to Berlin’s push to overhaul the eurozone’s treaty rules.
(Even a Greek single currency exit would present acute difficulties.)
And that’s before we even get into more macroeconomic arguments for monetary union, say based on Germany’s trading power — also noted by BarCap:
German economic growth has become increasingly dependent on foreign trade, which reached 5.5% of GDP in Q1 10, after reaching a record 9.3% at the end of 2007. Moreover, intra-EU trade accounted for c.70.5% of total exports, while intra-euro area exports contributed slightly more than 35% to total exports. Overall, the German economy and domestic employment are heavily reliant on European markets.
Amazing that facts like this have to be reiterated in analyst notes, we suppose.
Although it’s been a pretty amazing 2010 for the eurozone so far. To put it one way.
Full BarCap note in the Long Room.
Related links:
The IMF on Germany’s Bank-Asset-Berg – FT Alphaville
Greek exposure one-upmanship – FT Alphaville
Germany signals end of love affair with Europe – Guardian
The grasshoppers and the ants – Martin Wolf / FT