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Bailouts Test Limits of Taxpayer Tolerance: 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.

Biggest Guarantor

Nevertheless, a 62.7 billion-euro 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.

Unsustainable Boom

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.

Bond ‘Haircuts’

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 re-established. Whoever takes potentially enriching risks should also be required to bear the losses.

The protective shield hasn’t contained the sovereign- debt crisis, which is likely to spread to other countries. So Germany runs the risk of becoming the lender nation of last resort. Who will finally bail out Germany? The European Central Bank? Its policy of buying Greek and Irish bonds is already alarming. So far, German taxpayers have only seen costly compromises on aid-package deals.

When Jean-Claude Trichet steps down as ECB president next year, the appointment of a German candidate as his successor would be good news. That would give some reassurance to taxpayers that the debt crisis won’t be “solved” by massive inflation.

Anything else will only test the tolerance of German taxpayers.

(Karl Heinz Daeke is president of the German Taxpayers Association in Berlin. The opinions expressed are his own.)

To contact the writer of this column: Karl Heinz Daeke at presse@steuerzahler.de

To contact the editor responsible for this column: James Greiff at jgreiff@bloomberg.net

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