Euro-Crisis Redux Seen as Greatest Threat to Germany

A resurgence of the debt crisis that scarred the euro-area over the past 3 1/2 years is the biggest threat facing Germany in an election year, policy makers and leading economists said.

With sovereign bond yields declining in countries such as Italy and Ireland, governments across Europe cannot be lulled into thinking they can let up on their budget-cutting efforts, economists including Deutsche Bank AG senior adviser Thomas Mayer and Holger Schmieding of Berenberg Bank said during Bloomberg’s first Germany Day conference in Berlin yesterday.

“No nonsense,” Schmieding said during a panel discussion at the event, urging governments not to “backtrack in any way on the achievements” made so far. “If any country tried now to undo austerity, it would likely shatter confidence, it would probably spark another row in Europe, another wave of the euro crisis, and that wave of crisis would leave us all with less business investment, less jobs across the euro area.”

Policy makers including Chancellor Angela Merkel, Europe’s dominant political leader, risk complacency as they use a period of relative market calm to shift from crisis-fighting to longer-term efforts to bolster economic growth and combat record levels of unemployment in countries such as Spain and Greece. Leaders resume a two-day summit in Brussels today that was due to tackle Cyprus, the fifth euro country to call for outside aid.

Cyprus ‘Bail-In’

German lawmakers mindful of federal elections on Sept. 22 that will determine whether Merkel wins a third term are likely to back a bailout for Cyprus, said Otto Fricke, the budget spokesman in parliament for Merkel’s Free Democratic junior coalition partner. Investors will probably have to contribute the rescue, he said.

“I’m not sure whether we’ll have a decision on Friday,” Fricke told the conference. “If we have one, it’ll probably be one which is not only a bailout but also a bail-in.”

Nine months after Cyprus first called for international help, other concerns remain in the euro region, with Italy in political limbo following its inconclusive election last month and French President Francois Hollande appealing for fiscal “flexibility” to allow more time to bring down his country’s budget deficit.

France, as Europe’s No. 2 economy after Germany, poses a “serious economic problem,” said Schmieding. Across Europe, he called for “the political will to see the process through,” saying that “we have to get through this year until we reap the rewards.”

Schaeuble’s Call

Europe must hold to austerity to overcome the recession engulfing much of the region even amid signs the worst of the debt crisis is easing, German Finance Minister Wolfgang Schaeuble said in a keynote speech at the event. He cited yield spreads that have “sharply declined” as budget deficits have narrowed and labor costs decline.

Italian 10-year yields declined 2 basis points to 4.64 percent yesterday, while the yield on similar Spanish bond debt gained the most in two weeks. Spain’s 10-year yield rose to 4.87 percent after dropping to 4.70 percent on March 12, the lowest level since November 2010.

In Ireland, the government this week sold its first 10-year bond since the country’s 2010 bailout, and five-year borrowing costs have dropped to the lowest in almost eight years.

“We have no grounds to fall into depression,” Schaeuble said. “If we stay strong and plow ahead on this path, we will further strengthen the confidence that we’ve regained in the financial markets.”

‘Stupid Course’

Schaeuble rejected the U.K. media’s portrayal of the “stupid course of austerity” advocated by Germany, saying that in reality, Europe’s biggest economy is conducting “growth-friendly consolidation” with a fiscal policy that is fostering market confidence.

Competitiveness has gained in the past 15 years, the finances of Germany’s 16 states are “relatively solid” and the labor market is “robust,” Schaeuble said. Germany enjoys the lowest rate of youth unemployment in Europe and as a result wants to attract young workers from across the region.

“No one is snickering at Germany’s economic model now,” Schaeuble said.

Looking ahead, cheaper energy may give U.S. companies an advantage over German competitors, Morgan Stanley & Co. chief European economist Elga Bartsch told the conference.

‘Cheap Energy’

Merkel’s plan to phase out nuclear power and a U.S.- European Union trade pact that both sides say they want to negotiate raise the question of “whether Germany will actually remain this competitive in a situation where the U.S. is sitting on a lot of cheap energy,” Bartsch said.

Even so, “the thing that really worries me most when it comes to the outlook for Germany is also the European crisis,” Bartsch said.

The euro area has to make use of the window of opportunity opened by ECB President Mario Draghi’s pledge of unlimited bond-buying to defend the 17-nation currency, said Thomas Mayer.

The ECB’s actions have eased pressure somewhat and have given countries some room to “let up a little bit” on additional austerity, Mayer told the conference. “But you should not waste that moment now, where you have a little bit of breathing room, to attack structural rigidities.”

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