This Week in Germany

This week, Chancellor Merkel addressed the Bundestag, calling on the representatives of the German people to green-light Germany's share of the 750-billion dollar bailout package for the Eurozone, which they later passed.  She uncharacteristically raised the specter of failure of European integration, one of the core pillars of Germany's post-war economic policy, but assured that this would not happen.  "The option of pulling out of Europe is no option in this era of globalization," underscored the Chancellor.

There is no doubt that the situation is serious, but anyone who reads the papers in English was exposed this week to a financial metaphor that seems designed to elicit smirks.  "Naked short selling" refers to an activity temporarily banned by German regulators this week for sovereign debt and the stocks of 10 major financial institutions (The US SEC made its ban on naked short-selling permanent in July 2009).  The risqué terminology is meant to connote something risky. The German term Leerverkauf (literally, "empty sale") is less colorful but no more sanguine about what it means.

As is often the case with finance industry practices that sneak from the business section onto the front pages during crises, the laymen's term sounds as preposterous as the jargon.  Naked shorting means, according to the New York Times, "the practice of selling stock without owning it."  Like the, swaps, brakes, hedges and wolf packs of so much ado lately, it provides a tactile shorthand for obscure practices carried out by young men in collared shirts under fluorescent lights in glass skyscrapers and office parks.

Chancellor Merkel rose to the challenge of leading on issues that few people understand by using some very plain language to argue for an unpopular but necessary package to save the euro.  First, she made it clear that the 750 billion euro-package (Germany's share is equivalent to about $184 billion) is not a transfer of wealth to profligate spenders.  There are strings attached.  The aid comes primarily in the form of loan guarantees, which will only be granted to countries that have met strict austerity requirements.  No country is automatically entitled to receive any of the money.  Of course, the possibility exists that some countries could default on their debt anyway, but the package is meant to make this less likely by sending a clear signal to the markets that the eurozone stands behind its members.

The Chancellor also made it clear that the eurozone members will have to cut deficits, and Germany is not excepted. She said it had been a "major mistake" to loosen the rules on national deficits in the eurozone Stability and Growth Pact in 2004 and called for stiffer penalties, even the loss of voting rights, for eurozone members that do not control their budgets deficits in the future.

She also made it clear that international coordination on financial regulation in the context of the EU and the G20 are critical to returning stability to the markets. She spoke of re-establishing the "primacy of politics" over the financial markets and the roll of the state in guaranteeing order in a market economy.

There will be more mind-breaking jargon in the debates over how to achieve this.  The mechanisms that Chancellor Merkel said Germany will push for in the G20 include an "international financial activities" tax or a "financial market transaction tax."  Believe it or not, these are two somewhat different policy proposals.

However much mental fatigue it costs, this debate is critical, and the crisis presents a real opportunity for Europe to achieve the kind of political union it needs to make its economic union function better.  Chancellor Merkel actually summed it up rather succinctly:  "If the euro fails, then Europe too will fail. But if we manage to avert the danger, the euro and Europe will emerge stronger than before."

David Brown, Co-Editor, The Week in Germany, Webteam Germany.info.