Go no further than the chart below to understand the resentment and anger among the German taxpayers who are being asked to clean-up the “House Party” of fellow EU members. The chart shows the housing bubbles of Ireland and Spain against the German market, which experienced no appreciation in the 1999-2010 period.
It also illustrates the root cause of the stress in Ireland and Spain, where the sovereigns are effectively on the hook for a banking system buried in bad mortgages. The Spanish housing market has only just begun its price adjustment and appears has more to go on the downside.
America’s Tea Party revolt got its start in early 2009 with Rick Santelli’s rant on the floor of the Chicago Merc about taxpayers being forced to “pay for [their] neighbor’s mortgage that has an extra bathroom and can’t pay their bills.” (see video) The result was the trouncing of President Obama and the Democrats in the November mid-term elections.
Now, imagine the German taxpayer, after watching what took place in the Irish and Spanish housing markets as their homes essentially flatlined for a decade, being asked to clean-up the party they never attended. Sure, German exports benefited from their bubbles, but we’re talking “politics of resentment,” where rational debate takes a back seat to emotion.
We are on the brink of a transfer union, where huge amounts of money are channeled from richer to poorer countries. And Ireland isn’t even poorer than Germany. According to the International Monetary Fund, Ireland’s gross domestic product per capita is about 35,000 euros ($47,000), higher than Germany’s 31,000 euros. Taking purchasing power into account doesn’t change anything…
The Irish problem is mainly bloated banking and construction industries. Here, a painful downsizing and realignment is necessary. The Irish boom — especially in real estate — was unsustainable. Prices probably need to come down further. The losses inflicted by that must not be put on shoulders of taxpayers.
Ever since the financial crisis began, German taxpayers have urged the government not to let lenders off the hook. During the boom, we saw huge profits in private industry, welcomed and fostered by governments. More and more people thought they could get rich by selling each other real estate. German taxpayers weren’t part of that game, so they shouldn’t have to bear the brunt of bad investments. Private losses shouldn’t be socialized.