Euro bonus – what will Germany do?


A few days ago I wrote about a phenomenon I called euro bonus, defined as the difference between a normal interest rate and the current interest rate, which Sweden and some other low debt countries are enjoying for the time being.

My point was that this bonus over time accumulates to large amounts of money, benefitting the well managed countries – in Sweden´s case maybe more than 200 billion SEK over a ten year period.

The country receiving the greatest benefit from the euro bonus is Germany, the largest and strongest of all the economies in the Eurozone. Like in Sweden the current rate on at ten year government bond is presently 1.5 per cent p. a, the difference between a normal long term level and the present market rate thus being 2.5 percentage points.

The German national debt exceeds 80 per cent of GNP, while the said ratio for Sweden only reaches 31 per cent of GNP. In real money the German debt adds up to more than 2000 billion Euros.

If we calculate the German euro bonus as 2.5 per cent of 2000 billion Euros, we shall arrive at a value of 50 billion Euros p. a. – in Swedish currency staggering 450 billion SEK! This is indeed a measure of the transition of wealth taking place every year – as long as the differences of interest prevail.

Germany has been described as the state in Europe obliged to pull the heavier load in the bailout of the Eurozone. The country has become sort of a hostage, as most of the other countries are so much weaker. The conflict within Germany is obvious, where some understandingly enough, consider it unreasonable that Germany alone carry the burden.

It might also be questioned if Germany really has the strength to guarantee the cohesion of the currency union alone? The question becomes even more urgent with France now so plainly demanding Euro bonds. Nobody can ignore the fact that such commitments would rely most heavily on Germany.

However, it can be asserted that Germany through the implied Euro bonus receives an advantage which otherwise wouldn´t exist. Consequently, the Germans could, if they would, conclude that this has created a window to help their union mates. Will they do this? I doubt that, Angela Merkel has turned down all proposals about Euro bonds.

Strong forces stand against the desires of the indebted countries to share their financial burdens. The prime argument is that countries managing their debt services shouldn´t be punished, and that countries behaving irresponsibly shouldn´t be able to escape despite their negligence. The logic behind this reasoning is simple to understand, while it can also be deemed rational to argue that nobody can ignore what´s actually taking place.

What will come out of the ongoing chicken raze between Germany and the rest of EMU is impossible to predict – that it´ll not settle by itself is on the contrary sure.