Bailouts test lim­its of tax­payer tol­er­ance

The Pak Banker - - Editorial5 - Karl Heinz Daeke

These are test­ing times for Euro­pean tax­pay­ers, es­pe­cially Ger­man ones. The Euro­pean sta­bi­liza­tion pack­age, worth as much as 750 bil­lion eu­ros, al­ready meant a huge bur­den on or­di­nary peo­ple when it was set up in May 2010. But at that time we were still told that such a pro­tec­tive shield would suf­fice to fend off spec­u­la­tors around the world.

It hasn't worked. A few weeks ago, Euro­pean lead­ers agreed to grant Greece much more time to pay back its emer­gency loans. And on Nov. 21, a pres­sured Ir­ish govern­ment de­cided to tap the sta­bi­liza­tion pack­age. For Ger­man tax­pay­ers, that must have felt like a "black Sun­day." Other na­tions are about to fol­low the Greek and Ir­ish ex­am­ples. So it comes as no sur­prise that there has been talk of en­larg­ing the sta­bi­liza­tion pack­age, pos­si­bly to an un­lim­ited amount.

What does that mean for Ger­many? We are on the brink of a trans­fer union, where huge amounts of money are chan­neled from richer to poorer coun­tries. And Ire­land isn't even poorer than Ger­many. Ac­cord­ing to the In­ter­na­tional Mon­e­tary Fund, Ire­land's gross do­mes­tic prod­uct per capita is about 35,000 eu­ros ($47,000), higher than Ger­many's 31,000 eu­ros. Tak­ing pur­chas­ing power into ac­count doesn't change any­thing.

Nev­er­the­less, a 62.7 bil­lioneuro aid pack­age for Ire­land was set up, of which Ger­many is the sin­gle biggest guar­an­tor. The IMF con­trib­utes 22.5 bil­lion eu­ros, of which Ger­many pro­vides about 1.3 bil­lion eu­ros. The Euro­pean Fi­nan­cial Sta­bi­liza­tion Mech­a­nism pledges 22.5 bil­lion eu­ros --the Ger­man share is about 5 bil­lion eu­ros. The Euro­pean Fi­nan­cial Sta­bil­ity Fa­cil­ity pro­vides 17.7 bil­lion eu­ros, of which Ger­many gives about 6.2 bil­lion eu­ros.

So, Ger­man tax­pay­ers will guar­an­tee the re­pay­ment of about 12.5 bil­lion eu­ros lent to Ire­land.

The ques­tion, there­fore, is whether Ire­land will ever be in a po­si­tion to fully re­pay these loans. The aid pack­age of 62.7 bil­lion eu­ros amounts to a stag­ger­ing 40 per­cent of Ir­ish GDP. It is true that the Ir­ish govern­ment has al­ready taken sub­stan­tial mea­sures to curb the bud­get deficit. The re­duc­tions in pub­lic-ser­vice salaries of as much as 15 per­cent are im­pres­sive ex­am­ples of such aus­ter­ity. But that alone cer­tainly won't do the job.

The Ir­ish prob­lem is mainly bloated bank­ing and con­struc­tion in­dus­tries. Here, a painful down­siz­ing and re­align­ment is nec­es­sary. The Ir­ish boom -es­pe­cially in real es­tate --was un­sus­tain­able. Prices prob­a­bly need to come down fur­ther. The losses in­flicted by that must not be put on shoul­ders of tax­pay­ers.

Ever since the fi­nan­cial cri­sis be­gan, Ger­man tax­pay­ers have urged the govern­ment not to let len­ders off the hook. Dur­ing the boom, we saw huge prof­its in pri­vate in­dus­try, wel­comed and fos­tered by gov­ern­ments. More and more peo­ple thought they could get rich by sell­ing each other real es­tate. Ger­man tax­pay­ers weren't part of that game, so they shouldn't have to bear the brunt of bad in­vest­ments. Pri­vate losses shouldn't be so­cial­ized.

When the dis­cus­sions on as­sis­tance to Ire­land started, Ger­man Chan­cel­lor An­gela Merkel ex­plic­itly de­manded a con­tri­bu­tion from pri­vate len­ders. So it was an im­mense dis­ap­point­ment for Ger­man tax­pay­ers that the govern­ment didn't suc­ceed in that di­rec­tion dur­ing ne­go­ti­a­tions on the aid pack­age. What fi­nally was pre­sented was an agree­ment on the backs of tax­pay­ers while banks, in­surance com­pa­nies and in­vest­ment funds got off lightly.

Ger­man tax­pay­ers won't tol­er­ate that. Pri­vate len­ders must make con­tri­bu­tions that range from lower in­ter­est rates and later ma­tu­ri­ties to ac­cept­ing "hair­cuts" --losses from their hold­ings of govern­ment bonds. It isn't the duty of tax­pay­ers to pro­tect fi­nan­cial in­sti­tu­tions from write-offs.

If the " Ir­ish prob­lem" en­dan­gers Ger­man banks or in­surance com­pa­nies --when asked in­di­vid­u­ally, they deny it - - then the Ger­man govern­ment can act ac­cord­ingly. But mar­ket prin­ci­ples, which are at the root of our well-be­ing, need to be reestab­lished.

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