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Deutsche Bank's Troubles Touch a Nationalist Nerve

Therese Raphael writes editorials on European politics and economics for Bloomberg View. She was editorial page editor of the Wall Street Journal Europe.
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The International Monetary Fund warned three months ago that Deutsche Bank posed a potential systemic threat to the global financial system. Today the problems facing Germany's largest lender are fueling a different kind of risk: that of a growing nationalist backlash in Germany.

On Monday, the chairman of the German parliament's economics committee Peter Ramsauer gave an interview to Welt am Sonntag in which he called the $14 billion fine over Deutsche Bank's mortgage-backed securities business dating back to the financial crisis "extortionate" and said the fine "has the characteristics of an economic war."

Another German politician, Markus Ferber, suggested that the investigation into the bank's misdoings was "tit-for-tat" revenge for the European Commission's decision to slap Apple with a 13 billion euro ($14.6 billion) tax bill. And executives of some of Germany's biggest DAX-listed companies joined in this weekend to lend their support to Deutsche Bank. "German industry needs a German bank that accompanies us out into the world," BASF Chairman Juergen Hambrecht said.

Instead of parceling some of the blame on Deutsche's management, many Germans are circling the nationalist wagons. The idea that Deutsche Bank is in large part a victim feeds into an increasingly popular narrative that Germany's traditions, standards and institutions are under threat from outside. As we saw with opposition to genetically modified foods and the Trans-Atlantic Trade and Investment Partnership (TTIP), once entrenched, these views can create powerful policy red-lines. 

The main target of criticism has been the European financial system Germany helped create. The European Central Bank is blamed for hobbling Deutsche Bank, hurting German savers and propping up profligate, debt-ridden governments on the euro zone periphery. 

The ECB has weathered periodic attacks on its policies from Germany in the past. The ECB's bond-buying has even been challenged in Germany's constitutional court (which ruled in favor of the ECB.) But the criticism has grown more sustained lately. For only the second time in four years, European Central Bank Governor Mario Draghi went before German lawmakers in a closed session last week to defend the ECB's policies in the wake of Deutsche's problems. "If a bank represents a systemic threat to the euro zone, it can't be because of low interest rates. It has to do with other reasons," Draghi has pleaded.  

In all the protests about outside meddling, there's an element of posturing in the run-up to next year's national elections. With the populist, anti-euro Alternative for Germany party making striking gains in local elections, Germany's mainstream politicians are eager to lay blame elsewhere for Germany problems and demonstrate their own nationalist credentials to German voters weary of seeing German interests compromised for EU goals.

But the debate goes beyond election politics and interest rates. After the U.K.'s vote to leave the EU, but also the Greek crisis, the refugee crisis and now bank troubles, Germany is rethinking its stance on European integration. The wider the disparities between euro zone countries, the more vulnerable the entire single currency project. If Germany is going to shoulder the burden of propping up high-debt euro zone economies, the thinking goes, then Germany ought to get more of a say in how things are run.

It's an odd turn of events. Germany is pretty much the reason there is a European Union at all: The European Coal and Steel Community was formed in 1951 to harness German industrial might to French statecraft. The euro -- which Germany accepted as the price for reunification -- was fundamentally a political project to further tighten the knot. And export-oriented Germany has reaped the benefits of a currency that is substantially weaker than the Deutsche mark would have been, giving it an enormous trade surplus.

Economists at Germany's Halle Institute for Economic Research (IWH) calculated last year that Germany saved more than 100 billion euros ($112.4 billion) in interest costs between 2010 and 2015; that is, about 3 percent of German GDP. The savings, the economists noted, were greater than the costs of the Greek debt crisis, even if Greece failed to repay its debts. The IFW institute in Kiel, Germany, reckons that due to lower interest rates and Germany's status as a safe-haven country, Germany would save 160 billion euros by 2030.

Germany, one might fairly say, made its own luck. But nobody could deny the euro was a bonanza of sorts.

Given the competitive benefits that the single currency has brought Germany, it's perhaps ironic that the populist party challenging Germany's mainstream parties started as a movement opposed to the euro. But the euro's half-baked structure -- a monetary union without a fiscal union -- allowed huge imbalances to fester. Those imbalances are a drag on euro zone growth; they show up in high unemployment in the periphery of the EU, though France, with 10 percent unemployment and Italy with its debt levels exceeding 132 percent of GDP are very much at the EU's core.

Increasingly, Germany has grown impatient with the failure of other euro zone economies to become more competitive. Germany could boast continued manufacturing prowess, the Hartz reforms that liberalized labor markets starting in 2003, an effective apprenticeship program. Many of Germany's European partners, meanwhile, squandered the savings on debt-servicing that came with the era of low interest rates.

Germany can, of course, afford to be generous. The German economy is still Europe's largest and the world's fourth largest; unemployment remains at its lowest level since reunification. But there are some signs of underperformance. Growth is set to slow next year, and productivity growth has been low. VW's humiliation over rigged diesel emissions systems, and now Deutsche Bank's fast-shrinking market value, punctured the ideal of the ultra-efficient, impeccably run German corporation. When the going gets tough, the tough find someone to blame. 

Draghi has suggested that the country could do much more on the fiscal front to stimulate growth and investment. But Germans aren't in a mood for lectures. They are tired of being told they have to accept the standards set by others. One might even say that Germans have much more in common than many assume with Britain, another beer-loving, soccer-crazed nation with a vibrant economy and a Protestant work ethic that grew weary of communitarian demands. Indeed, the Brexiter's mantra "take back control" is sounding better and better to German ears. 

They may be much more loyal Europeans than Britons, but Germans are increasingly skeptical ones. And if nationalist appeals resonate in Germany, traditionally the EU's most reliable team player, it's a good bet that decentralizing forces in Europe will become stronger all around. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Therese Raphael at traphael4@bloomberg.net

To contact the editor responsible for this story:
Jonathan Landman at jlandman4@bloomberg.net