PARIS (Reuters) - What if German savers were to help rescue Greece, Portugal or Spain by investing in their state assets and companies rather than bailing them out with taxpayer-backed loans?
That novel idea for recycling Berlin’s huge current account surplus, avoiding fire sale privatisations in the weakest euro zone states and boosting growth in southern Europe comes from French economist Olivier Garnier.
The group chief economist of Societe Generale bank argues that creating an agency in charge of purchasing, restructuring and privatising state-owned assets could solve several of Europe’s deep economic problems over time.
The “European Treuhand (Trust) Agency” would offer a “debt-for-equity conversion” that could repair the public finances of the euro zone’s bailed-out states, reduce North-South current account imbalances in the 17-nation currency area and generate investment in Europe’s periphery.
Garnier argues that the idea offers German savers a better financial return than parking surplus cash in domestic bank deposits earning zero nominal interest, and is politically more palatable for Germans than risky taxpayer loans to governments that may never be able to repay the debt, or be fully recouped.
The fact that such long-shot proposals are doing the rounds four years into the bloc’s debt crisis highlights how few of the underlying problems that caused it have been resolved.
This idea may be timely as Chancellor Angela Merkel tries to soften Berlin’s image as Europe’s stern austerity enforcer and show a gentler side with initiatives to help fight youth unemployment in crisis-stricken euro zone countries.
But to bitter Greeks or Spaniards it might look more like an exercise in German colonisation than a helping hand. While Dutch, Austria or Finnish savers might join, the “European” agency would inevitably be dominated by German money.
Quoting Finance Minister Wolfgang Schaeuble’s comment that “we want to show that we are not just the world’s best savers”, Garnier says: “He should have added that the Germans have to show they can be wiser investors, making a more efficient use of their savings and of their related taxpayers’ guarantees.”
His idea has a German precedent. After the fall of the Berlin Wall and German unification in 1990, a trustee agency known as the “Treuhandanstalt” was set up to restructure, wind up or sell off East German state enterprises, as well as owning farmland, public housing and former army property.
Some top talents of West German business were recruited or volunteered to help shake out and spin off eastern companies.
But the example points to some of the political obstacles to Garnier’s proposal. The Treuhandanstalt was bitterly criticised for mass layoffs of nearly 2.5 million workers out of the 4 million it inherited, and for shuttering businesses that critics said were profitable.
It contributed to lingering East-West resentment over the social and financial costs of German unification, and its first president was killed by (west German) Marxist assassins.
Privatising state-owned companies and property are a key part of the bailout programmes prescribed by the European Union and the International Monetary Fund for the euro zone’s debt-laden governments.
Yet Greece’s consistent failure to meet its privatisation revenue targets highlight just how hard it is to attract serious investors to countries mired in deep recession, and to sell even profitable businesses for a fair price.
Athens’ attempt to sell natural gas company DEPA collapsed in June, blowing a 1 billion euro hole in its bailout plan, and raising further doubts about plans to hawk the state gambling monopoly and the loss-making railways.
Elsewhere in the region, so-called vulture funds of private equity investors are looking to pick up stakes in blue-chip Spanish companies at knock-down prices after bailed-out banks were forced to divest.
Under Garnier’s model, a long-term investment vehicle funded by both private sector and German government savings, or with a state guarantee, would buy up the assets, taking them off their governments’ books, then restructure and run them until they can be sold off profitably.
He calls this “enhancing cross-border capital ownership of banks and corporates”, but many Greeks are likely to see it as a hostile German grab for their national treasures, while Germans may view it as a risky way to place their money.
When the top-selling German daily Bild ran a headline at the start of the debt crisis in 2010 screaming “Sell your islands, you bankrupt Greeks! - and the Acropolis too”, it caused fury, rekindling resentments smouldering since World War Two.
German economists Daniel Gros and Thomas Mayer suggested last year that Germany should create a sovereign wealth fund to invest excess savings mostly outside Europe in a portfolio of assets, as Norway, Singapore or Saudi Arabia do.
Such a fund would be a safer and more efficient way to place German savings than in unremunerated deposits at the European Central Bank, they argued. It would also have the side benefit of lowering the euro’s exchange rate, which would benefit struggling south European economies.
Garnier would put that money to work inside the euro zone.
He notes that Germany’s KfW state-owned development bank is already dipping a toe in these waters by providing loans, though not equity capital, through its Spanish counterpart to credit-starved small and medium-sized businesses.
His proposal raises three other issues: would the agency be able to run the assets more efficiently than current owners?; how would the risk to German savers’ capital be mitigated?; and how could the assets be valued at prices acceptable to all?
His answer to each question is that the status quo is worse: the assets are mouldering while governments desperately need the money; Germans face risks from the bailed-out countries as taxpayers so why not get some return on their savings; and the assets could be priced in a way that allowed for some upside for south European states if they fetch more on the market.
“I see all the hurdles, but it would be ill-advised to rely only on fiscal transfers to share risks among euro zone economies,” Garnier said in an interview.
“A European fiscal union raises even bigger obstacles than this - abandoning budget sovereignty - and writing off official debt would be fraught with legal and political obstacles.”
Writing by Paul Taylor, editing by Mike Peacock