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Germany has to repair its frayed euro area ties

Angela Merkel, German Chancellor and Chairwoman of the German Christian Democrats (CDU).
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With nearly half of its exports absorbed by the euro area and more than 60 percent of its huge trade surplus (about 7 percent of gross domestic product – GDP) generated within the monetary union, German Chancellor Angela Merkel's assurance to her voters that "the euro is good for us" sounds very convincing.

Her Finance Minister, Wolfgang Schäuble, who ought to know exactly how good the euro is for Germany, went even further last week. This enthusiastic Europhile launched a broadside at an apparently rising euro skeptic party, Alternative for Germany, saying that life in Germany without the euro would be "extremely dangerous."

(Read more: Merkel wins resounding victory in German election)

That is apparently the view shared by more than two-thirds of Germans who wanted Angela Merkel to serve a third consecutive term as their country's chancellor.

Investors, too, can believe in her commitment to the euro, regardless of the color-coded coalition she will lead during her next term in office. Just like the outgoing black-yellow government of Christian Democrats (CDU/CSU) and Free Democrats (FDP), the grand black-red coalition of CDU/CSU and Social Democrats (SDP) will be fully devoted to the strong and competitive euro area.

Uncertainty may loom for Germany

Dancing around the euro area

And yet little was said about the euro area during the election campaign. The less said the better was probably a wise choice, because there are no votes in endless bailouts. And none of the big parties could claim any advantage from Germany's muddled and deeply resented austerity policies the governing coalition and the opposition consistently voted for in the German parliament.

Apart from that, Germany had nothing new to say about the euro area. Two of the most fundamental issues for the stability of the monetary union have been solved, or are nearing a solution, and Berlin's key euro partners have signaled that there is no political support for any further integration moves requiring transfers of sovereignty to EU institutions.

The euro area fiscal agreement ("the fiscal compact") was signed in late 2011. Its first version was literally dictated by Germany, with a single-minded insistence on strict budget rules. And then, caught up in a political ambush led by France, Italy and Spain, Germany had to accept amendments to that agreement in mid-2012. These countries wanted – and got – a document showing a more balanced concern for economic growth and sound public finances.

(Read more: The secret recipe of German economic success)

The fiscal compact reinforced earlier rules on the budget deficit (3 percent of GDP) and public debt (60 percent of GDP), with commitments to balance public sector accounts. Member countries' budget processes are also subject to close monitoring by the EU Commission and peer reviews, where Germany, to the annoyance of countries like France, already plays an active part.

The banking union – another key euro area project – is nearing completion. On September 12, 2013 the European Parliament voted, by an overwhelming majority, to give the European Central Bank (ECB) the authority to supervise some 6,000 banks in 17 euro area countries. There are still open questions regarding the restructuring, or winding down, of insolvent financial institutions. The possibility that national authorities may retain supervision of smaller local banks is also being discussed. It is expected that both problems will be solved in the months following the constitution of the new German government.

What is left then are the "troika" (the EU Commission, the ECB and the International Monetary Fund) monitoring the ongoing programs of structural reforms and financial assistance for Cyprus, Greece, Ireland and Portugal. Reform programs and fiscal management in Italy and Spain (30 percent of the euro area economy) are also closely watched because of their potential for political instability.

Clearly, there is little material here for campaign speeches in a fully-employed German economy where voters were reported to have been more preoccupied with American and British cyber spying than with riots, strikes and rising poverty in Greece, Spain and Portugal.

"Germany dozing off on a volcano"

But the euro area periphery's problems will come back center stage because they really never left the mainstream of the region's politics. And that mainstream seems to believe that Germany bears a heavy responsibility for the mismanagement of the financial crisis and the imposition of devastating austerity policies.

(Read more: Anti-euro party powers ahead as German elections near)

These beliefs are reflected in a resigned exasperation of the former Eurogroup (a forum of euro area finance ministers) chairman and Luxembourg's Prime Minister Jean-Claude Juncker. Hitting the German wall for the nth time, here is what he said in an interview to the French daily Le Figaro on July 29, 2012: "How can Germany have the luxury of playing domestic politics on the back of the euro? If the other euro area members did the same thing, what would remain of our common project? Is the euro area nothing more than a branch office of the German Federal Republic?"

Investors should take that as a widely shared view that Chancellor Merkel's Germany had vastly overplayed its hand, and that Berlin's new leaders will have to tread very carefully in the months and years ahead.

While you watch these events unfold, here are a few pointers you might find helpful.

Get rid of the myth and platitudes that Germany is Europe's paymaster. Germany pays its euro area contributions according to the size of its economy in that region – 27.9 percent at the latest count. That is the common rule for all the other EU and euro area countries. The big difference is that most of these other countries don't get back some of their money through large trade surpluses the way Germany does.

Here is an example. In 2012, Germany had a 97 billion euro trade surplus with the euro area. In the first three months of this year, that surplus was running at an annual rate of 102.4 billion euros. To understand the importance of this, think of the fact that Germany's paid-in capital in the euro area bailout fund (European Stability Mechanism – ESM) is 21.7 billion euros (exactly 27.1 percent of the total), which is less than one quarter of Germany's trade surplus with its euro partners.

Not a bad deal indeed. That is why these surpluses prompted the IMF's Managing Director Christine Lagarde to say – at the height of the financial crisis in early 2010 (when she was still serving as France's finance minister) – that they were a major cause of structural instability in the euro area and that "Germany was getting rich off its trade with euro partners."

(Read more: Euro zone's 'North-South divide' to widen further)

Now for the irony: Germany's euro partners have been repeatedly, and publicly, berated by Chancellor Merkel for "failing to respect the budget rules and to supervise their banks."

The next important thing to note is that Chancellor Merkel won't get her oft-repeated wish – which some of her euro area partners took as a stalling negotiating ploy – for "more Europe" (a deeper political integration). France apparently quashed that idea because it does not want any further sovereignty transfers.

France is not alone in its apprehensions about Germany's rising clout and the risk of losing control of its policies. The political elite and the population at large in the indebted euro area countries are seething with anger at the pain and humiliation inflicted by harsh austerity policies. Italy's elections last February, for example, were run – and won – on anti-German political platforms, ending the political career of the Prime Minister Mario Monti, who was accused of following Chancellor Merkel's economic policies.

These events are part of the political dimension to Mr. Schäuble's warning that the loosening euro ties could be "extremely dangerous" for Germany. Jürgen Habermas, one of the most influential contemporary philosophers, sounds even more ominous when he says that "Germany is not dancing on the volcano; it is dozing off on top of it."

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Michael Ivanovitch is president of MSI Global, a New York-based economic research company. He also served as a senior economist at the OECD in Paris, international economist at the Federal Reserve Bank of New York and taught economics at Columbia.