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Opinion: If the Euro Fails, Germany Will Be Responsible

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Given that Germany is shouldering risk to the tune of hundreds of billions for a life-threatening euro crisis, it may seem absurd that Berlin is perceived abroad as 'euro Nazis' rather than as a benevolent leader. But should the common currency fail, Berlin will be to blame.

The crisis in Greece has created a tight-rope walk for the future of the euro. If the euro-zone falls, fingers will likely be pointed squarely at Berlin. Zoom
Corbis

The crisis in Greece has created a tight-rope walk for the future of the euro. If the euro-zone falls, fingers will likely be pointed squarely at Berlin.

It is a surreal scenario. Gigantic risks. Staggering sums of money. The degree to which the political debate has become polarized is likewise unbelievable -- both among European Union member states and within those societies themselves.

In the Greece of today, the government has to be protected from its own people. In the Netherlands and Finland, right-wing populist parties have made huge gains on terrain normally held by large, centrist parties. In Germany, Chancellor Angela Merkel isn't even certain of a parliamentary majority when a second bailout package for Greece comes up for a vote.

It is the kind of escalation that would have been unthinkable only a few years ago.

Rescue efforts have been underway for three years now -- first the banks and then the countries. But instead of coming together in times of crisis, Europeans have become divided. And there is a lot at stake. A break-up of the European currency union has now become a realistic scenario. Indeed, the political climate has become so toxic that a collapse of the European Union and of the idea of European unity -- and the entire European postwar order -- also seems possible.

Governments across the Continent are currently working feverishly to prevent such a disaster. On Friday, French President Nicolas Sarkozy and German Chancellor Angela Merkel met in Berlin -- where they reached the smallest-possible compromise. And on Thursday and Friday of this week, European Union leaders will meet at an EU summit. There are still chances for the European project to succeed, but they are becoming increasingly limited -- as main actors in this drama have begun admitting in confidential discussions.

Germany Is Missing an Historic Opportunity

If the euro fails, the Germans will be seen in the end as having been the primary culprits. And rightfully so.

In 2009 and 2010, Germany suddenly found itself in the position of being akin to a European hegemony. It was the only large euro-zone member state that was economically healthy and had more competitive economic structures and less public debt than the others. Germany could have acted as a "benevolent hegemony" -- indeed should have. Similar to the United States after World War II, Germany should have been prepared to provide generous amounts of money very early on -- tied to the creation of new, more powerful European institutions, including a new European Union treaty. Merkel could have -- and should have -- led Europe towards a common future.

Instead, national politics in Germany became transfixed by state elections with leaders making populist claims that there was no money for feeble southern European countries. Rather than continuing the traditions established as far back as the times of former Chancellor Konrad Adenauer in the 1950s -- a period which saw European countries anchored ever more firmly in a European framework -- we are now returning to a balance-of-power approach. The common fate of the Europeans is no longer the top priority. Instead we are juggling national interests.

Or rather, what some consider to be their national interests. Just take the German government's wish that private creditors also be made to pay for part of the debt crisis. At the end of the day, it is little more than symbolism. Debt forgiveness wouldn't help Greece at all. On the contrary, it would remove Greece from the capital markets for many years to come and it would eliminate any possibility for the country to ensure its own credit for the foreseeable future.

Greek Bashing Is More Popular than Action

The German government also seems to care little that the European Central Bank is slipping into serious distress. Speculation is heating up, further exacerbating the crisis. Nevertheless, Berlin is still insisting on a haircut: as a matter of principle, but also because there are many in the government who would like to show the financial markets (and the Greeks) that they mean business.

Throughout the crisis, the German government has behaved as if we were still living in the 1990s, as if there were a serious alternative to today's currency club. And it has ignored the fact that our financial system is so tightly interwoven that if part of it fails, we could all fall. From the very start of the crisis, there was no other choice but to expand transfers within the euro zone. The same held true for a deepening of political union within the common currency area. Unfortunately, Greece bashing is more popular.

Now payback time has come. Germany is in the impossible situation of having ponied up hundreds of billions of euros but is nevertheless being pilloried. Some Greek newspapers refer to Germans as "euro Nazis," and not as a benevolent leading power. The fact that the situation has deteriorated so far does not speak well for statesmanship in Berlin -- and that is putting it mildly.

Instead of showing steadfast solidarity, the markets are testing the potential collapse of the euro. And that scenario is becoming increasingly likely -- not because anybody wants it to but because so many different players must come together to find a solution and it is quite possible they will not succeed in doing so.

If the euro-zone breaks apart, it is Germany that will be blamed -- because it was the country that could have saved the euro but didn't do so out of short-sighted self-interest. The damage, should it come to that, will be much more than monetary.

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1. Several Questions
lakechamplainer 06/22/2011
1. Was it made clear to the voters of the various Euro states, when they were voting to join the Euro region, that if part of it failed, the whole would fail? 2. Why is it desirable that Greece go back to the capital markets, when they have proven they are not creditworthy? 3. Doesn't the fact that the Greek government needs protection from its own people tell us that the European experiment has already failed?
2.
ausmichigan 06/23/2011
@lakechamplainer 1. No, the eurozone was specifically set up to prevent bailouts (and the purchase of national bank bonds by the ECB) - the governments simply decided to ignore the rules because it was more politically expedient at the time. However, it is a gross exaggeration to say that if Greece falls, the whole Eurozone will collapse. The real fears are that (i) European banks, including the ECB, that hold Greek government bonds, or debt from the Greek banking system, will require huge capital infusions if Greece defaults and (ii) that creditors will stop lending to Portugal, Ireland, Spain, Italy and Belgium if the Greece defaults. The problem of systemic bank failures is more rational than the contagion issue. 2. Greece is running a massive deficit, even with their "austerity" package. Without additional funds, they will be unable to pay basic government salaries by the end of the summer, much less interest on their debt. There are three basic ways to fund a deficit - (i) take it out of reserves or asset sales, (ii) print money or (iii) borrow. Greece has no reserve. Their austerity package includes asset sales (mostly land and interests in state-run enterprises). The current plan to sell assets will not bring in nearly enough euros to continue government operations through the year. Greece cannot print money because they are part of the Euro system, so their only choice is to borrow. It would, of course, be preferable if they could borrow from the private credit market, but that is a far-off dream now, even without a default. 3. The European experiment hasn't failed. Greece simply needs to decide if they want to remain a part of the experiment.
3.
ausmichigan 06/24/2011
@sysop "Given that Germany is shouldering risk to the tune of hundreds of billions for a life-threatening*euro crisis, it may seem absurd that Berlin is perceived abroad as 'euro Nazis' rather than as a benevolent leader. But should the common currency fail, Berlin will be to blame." Should the Germans care more about doing what is ecomomically and financially correct for Germany and the entire Eurozone, or should the Germans care about being called "euro Nazis"? The truth of the matter is that Greece will never be able to pay all its debt. The current one-year bailout (which really won't even last the full year given the Greek economy), will only give the banks another opportunity to unload their exposure to Greek debt - effectively turning private bank loans into government loans funded by the Eurozone. In other words, this is not a Greek bailout as much as it is a bank bailout. It just happens to be more politically expedient to call it a Greek bailout. When the Greek debt is finally restructured one or two years from now, everyone will suddenly be "shocked" to find that a huge percentage of the Greek debt is held by European governments or the ECB.
4.
BTraven 06/27/2011
Zitat von ausmichigan@lakechamplainer 1. No, the eurozone was specifically set up to prevent bailouts (and the purchase of national bank bonds by the ECB) - the governments simply decided to ignore the rules because it was more politically expedient at the time. However, it is a gross exaggeration to say that if Greece falls, the whole Eurozone will collapse. The real fears are that (i) European banks, including the ECB, that hold Greek government bonds, or debt from the Greek banking system, will require huge capital infusions if Greece defaults and (ii) that creditors will stop lending to Portugal, Ireland, Spain, Italy and Belgium if the Greece defaults. The problem of systemic bank failures is more rational than the contagion issue. 2. Greece is running a massive deficit, even with their "austerity" package. Without additional funds, they will be unable to pay basic government salaries by the end of the summer, much less interest on their debt. There are three basic ways to fund a deficit - (i) take it out of reserves or asset sales, (ii) print money or (iii) borrow. Greece has no reserve. Their austerity package includes asset sales (mostly land and interests in state-run enterprises). The current plan to sell assets will not bring in nearly enough euros to continue government operations through the year. Greece cannot print money because they are part of the Euro system, so their only choice is to borrow. It would, of course, be preferable if they could borrow from the private credit market, but that is a far-off dream now, even without a default. 3. The European experiment hasn't failed. Greece simply needs to decide if they want to remain a part of the experiment.
According to the data presented by the Spiegel only Greek banks were affected by a collapse because they did not manage to sell their loans taken out by the state to the ECB since they could not afford to write off the reductions. I believe the Balkan will be much more affected as Greece plays an important role there. And Greece itself, of course. And American banks could be harmed a lot, too, because they sold many credit default swaps to those banks which lent Greece money. It seems to me that the banks which are based in countries having great problems at the moment are affected mostly from failing. http://www.guardian.co.uk/commentisfree/2011/jun/27/greece-bailout-eu-neocolonialism
5.
BTraven 06/27/2011
Zitat von lakechamplainer1. Was it made clear to the voters of the various Euro states, when they were voting to join the Euro region, that if part of it failed, the whole would fail? 2. Why is it desirable that Greece go back to the capital markets, when they have proven they are not creditworthy? 3. Doesn't the fact that the Greek government needs protection from its own people tell us that the European experiment has already failed?
It’s not desirable, of course. They rely on low interest rates which only the ECB can offer. And a bit of inflation would help to reduce the debts, too.
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