On Monday the 3 rd of October, Germans paused to reflect on a critical event which occurred 26 years ago - the reunification of East Germany (the German Democratic Republic) with the West (the Federal Republic of Germany). Instead of Germans cheering and celebrating, they angrily waved placards which read “Merkel must go”.
It’s hard to understand why they are so angry. Shouldn’t they be celebrating their economic fortunes? Living conditions are good. Most Germans have jobs and their unemployment rate of 4.2% is the lowest in the EU, a level last seen in 1981.
The plentiful job situation is also reflected by strong trade. Germany is the proud owner of the largest current account surplus (thus far) for 2016. This means they are exporting more Volkswagens and Deutsche Banking services to the rest of the world, than they are importing oil and others.
Germany (along with the broader European Union) also plays host to some of the world’s lowest borrowing rates. It’s almost impossible for an Australian home owner to imagine a) being able to borrow 100% of the purchase price of your home, and b) doing so at a rate of 0.89%.
Yet with the job, trade, and economic environment listed above, German’s are still most unhappy with Chancellor Merkel.
Time Magazine’s 2015 Person of the Year is no longer in favour. Some would argue the net beneficiary of the EU experiment has been Germany… but is this all set to unravel?
German industry has taken advantage of the ECB’s stimulus and negative interest rates. They have exported as much as they can to record a € 300 billion surplus, or 9% of their gross domestic product (GDP). But this is in direct breach of the Maastricht Treaty’s 6% limit on EU Members.
It doesn’t stop there or at Volkswagen’s emission scandal. The US Department of Justice is accusing Deutsche Bank of mis-selling mortgages in the lead up to the Global Financial Crisis. They face a fine of $14b, of which they only have about $5b set aside. The fine would seriously stress Deutsche Bank, and would rely on further capital raisings to stay afloat.
What’s more, if Deutsche Bank were to fail, the ramifications would be enormous. Their balance sheet is worth $2 trillion dollars and, as the IMF identified back in June, they are the biggest contributor to systemic risk globally. That is, Deutsche Bank’s tentacles are everywhere… and can be thought of as “too big to fail”.
Chancellor Merkel’s austerity toward other EU member states, refusal to allow help to Italian Banks, and open door refugee policy has contributed to a number of issues. These include Brexit, and more broadly, growing nationalism & protectionism. She is also facing the quandary from the EU’s stance on refusing any Italian bank bailouts, which means she cannot help Deutsche Bank (even if she wanted to).
Instead of celebrating 26 years of a wall coming down, we now face walls going up.
