Up until now Germany has been portrayed as the powerhouse of Europe, the unshakeable pillar of economic strength marooned in the mess of its peripheral neighbours.
While German equities have suffered in tandem with other markets in recent months, the suggestion thus far has been that they are dragged lower through association. (In the same way your very middle class, teenage son might be tarnished by the wrongdoings of his badly-behaved mates.)
The comparative ‘safe haven’ status of Germany has been further evidenced by the mass inflows into ETFs tracking the DAX index.
What this latest bond auction proves is that Germany is far from immune to the severe market jitters affecting the rest of the eurozone.
Merkel & co know this only too well: which is why Germany, contrary to what some hope/expect (?) will not leave the eurozone.
Bank of Germany
The truth is, whatever the solution to the crisis ends up looking like to you and I, the bulk of the bankroll will come from Germany and to a lesser extent France.
This may well be concealed behind closed doors, as the leaders know how unpalatable a pill it will be for their voters to swallow.
But whether it is through further funding to the EFSF, bond purchasing from the ECB, or even just extra liquidity provision to banks which will then buy European sovereign bonds, there’s not doubt who will have the final say.
Over the past few days, most commentators have agreed greater fiscal union and an expansion of the powers of the ECB to lender of the last resort are necessary to save the euro.
The survival of the euro does not equate to the survival of the eurozone as we know it, however. Increasingly, it is looking likely the European Monetary Union will shrink in size.
Vested interest
But the reason Germany is not about to turn deserter is two-fold: Firstly, it has worked long and hard on the eurozone project and secondly, it has a vested interest in its success.
A vast amount of Germany’s exports are with its European neighbours, and its banking system is also interconnected with the rest of the region.
If disorderly defaults were allowed to occur and the euro allowed to fail, Germany would be forced to recapitalise its banks, which could end up being a darn sight more expensive than propping up its neighbours.
One commentator has said, rightly or wrongly, that Germany has tried twice in living memory to dominate the rest of Europe, now it has the chance to do it economically, so why would it turn and run?
