Make a car? Sure. Win a Word Cup? Yup. Write a symphony? Without doubt. There are lots of things that you rather have a German doing than anyone else in the world. But there are also a few things you’d rather they didn’t. Right now, rescuing a bank is right at the top of the list.
All this week, the financial markets have been gripped by the slow-motion car-crash of Deutsche Bank. An institution that was once the mightiest in Europe, and a by-word for financial stability, is now teetering on the edge of collapse. Its share price has halved this year, and today is hitting a fresh 30-year low. The cost of insuring against a default has soared, and now the hedge funds are refusing to deal with it. It is not quite in bank run territory yet - but it is getting perilously close.
And yet, what is the German government doing about? Taking a bad situation and making it worse.
Extraordinarily, the crisis is one largely of Angela Merkel’s own making. Last weekend, the government briefed Focus magazine – in Germany a cross between the Economist and the FT, and so widely trusted – that there would be no bail-out of the bank if it ran into more trouble. It was hard to understand why it needed to do that – no one was particularly demanding that it say anything. But once that information was put into the public domain, it was completely predictable that investors would panic. Ever since 2008, rightly or wrongly, the markets have assumed that in a crunch, a major bank will be bailed out. If Germany was seriously saying it would let Deutsche go to the wall, they could hardly be blamed for running for the hills.
In a single move, confidence was shattered. To make matters worse, the government then briefed there was a rescue plan in place, and then denied it was even under discussion. The result? Chaos. Does the state ultimately stand behind Deutsche? Will the European Central Bank step in if it has to? No one has any real idea anymore.
Of course, German is partly trapped by its own rhetoric. It has spent the last five years blaming the euro-zone crisis on feckless Greeks, Italians and Spaniards, and contrasting it with their own fiscal responsibility. They allowed the Greek banks to go down, and the ATMs to be shut, they let the Irish banks collapse, and all this year they have watched the Italian banking system slide into insolvency while piously insisting that ordinary depositors had to bear the brunt of the losses. It is hard to turn around now and rescue their own bank - and indeed German-designed euro-zone rules make it even harder.
But so what? In reality, there is no good argument for letting Deutsche Bank go down. It is one of the most systematically important banks in the world. The losses from a calamity on that scale would ripple out across the world. It would land a potentially fatal blow on the fragile euro-zone economy. It might well be humbling for Merkel to have to launch a rescue. But it is certainly better than the alternative – which is a total meltdown of the euro-zone’s financial system.
At the very least, the German government needs to make clear that is has a rescue plan in place. It needn’t be that hard. The bank can be re-capitalised, with the state taking a majority stake, along the lines of the Lloyds rescue in this country in 2008. It can then be slimmed down and restored to heath, and the stake gradually sold back to the market, again much like Lloyds. The crisis will be over – and a bank run averted. If it doesn’t, confidence will soon evaporate completely – and it will be over-taken by a crisis completely of Angela Merkel’s own making.