Thursday, 4 April 2013

What (German) Taxpayer Money at Risk?

It is not that anyone expected small countries to receive the same treatment as larger ones. Nor that everyone would be treated equally in the EU. Other than proclaiming "solidarity, friendship, co-operation" the people of Europe have seen very little of that from their politicians (not to mention other nations' politicians). What makes matters even worse is that decisions taken at the highest level are not even consistent.

Lately, an article in Spiegel reminded us of two incidents which happened during 2011:
1. The bail-out and nationalization of Hypo Real Estate
2. The bail-out of Commerzbank

In the first case, the German state assisted the mortgage-lender with more than €20bn, while simultaneously guaranteeing about €145bn of assets in it. The latter is just a case of the state funding the bank with more than €18bn and the bank winning a European approval to postpone the sale of its real-estate unit by 2014, effectively changing the bail-out terms.
What should be noted is that these funds came from actual German taxpayer money, with no obligation of actually returning those money back. In contrast, all other bail-outs in Europe cannot be considered a waste of taxpayer money. Let's elaborate on that. About a year ago, the bail-out agreement with Greece resulted that the latter would have to pay an interest rate of about 3.65%. Four months ago, at a Eurogroup meeting, Finance ministers agreed to reduce that rate by 1%, in order for the debt burden to remain sustainable. Thus, the effective interest rate earned is approximately 2.65%.

For comparison, the highest deposit rate for fixed or time deposits in Germany is currently at 1.4% according to Europe Bank Account Rates. Thus, the German state is in fact investing German taxpayer money, earning a substantial 1.2% more than having it sit around in a bank. There are those who might say that this reflects the fact that Greece represents a risky investment that makes interest rates so high. Yet, according to formally used risk-weights investing in government bonds is a zero-risk investment. In addition, none of the money invested in the country has so far been lost; in contrast 71% of the private sector money involved in the deal vanished into thin air. The EU appears to be the best investor in the world right now: it has money to invest, needy countries who are begging for money, thus agreeing to pay a higher interest rate (although lower than the market one) and it has the opportunity to shape laws the way it wants so that its funds are protected.

Until now, the EU has agreed on providing 144.7bn to Greece, out of a total 164.5bn package. This means, that if percentages are used as in the European budget, 21.11%, or €30.54bn of that money will come from Germany. This is an amount less than 1% of the German GDP, yet it allows for more than 800m for interest proceeds per year, for the next 30 years. What is more, this is more than 380m per year more than what they would have gotten if they had invested the money in a bank. 

It was more than known that Germany was earning huge amounts of money through lower debt interest rates; during last August, the yield for German bonds was actually negative! People were actually paying Germany to hold their money. Yet, Germany, as the rest of the well-off EU countries are pushing the deal even further by being both regulators and investors. The excuse of protecting "German Taxpayer Money" is not quite valid at the point: the German taxpayer is either earning a significant amount of money for that investment, or his money is not at all in danger if the ESM/EFSF or the ECB is paying. Regarding every euro coin as your own does not make it such.

Think of the latest deal with Cyprus. The amount to be given via the EFSF/ESM funds is €10bn, with the island paying an interest rate of about 2.5-2.7%. The most interesting part is that there are no taxpayer money at risk: by construction, all Eurozone countries have to guarantee the fund, yet no country will actually hand over any assets to it; bonds will be issued in order to cover the bail-outs it will make. Essentially, this makes the EFSF a large speculative fund with no chance of losing money: 2.5% yearly return on risk-free assets, through borrowed money and an ability to shift regulation at its will.

Then why is it that they worry about taxpayer money if that is not invested? I will leave the discussion on whether having a state act as a speculative vehicle good is beneficial. Yet, if the major concern for assisting an ailing state is moral hazard, then why not regulate banks more efficiently in the first place? For example, why did the ECB throw so much money at a bank which was evidently bankrupt since last summer? Better policies are in need if the intention is to keep the euro alive. 

P.S. As for the obsession with price stability, if the ECB is generating money, even via the "printing machine" so feared by German authorities, this does not mean that Germany will face a large inflation rate nor is that money German; they belong to Europe and the receiving nation. In addition, as Paul Krugman stated more than two years ago, money in one country does not affect inflation in all the others. For example, Cyprus could have a 20% inflation and the overall EU inflation would have been affected by much. This simple fact is also declared on the ECB's website (although I could not find the actual weights) and yet it is never mentioned.

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