Fair. Balanced. American.

Monday, June 18, 2012

Germany's dirty little secret

Floyd Norris, on the money, as he so often is.
In hindsight, the critical moment in the crisis may have been when Ireland’s banks failed in early 2009. Had the Irish government taken the position that it would stand behind deposits, but that loans made to the banks would be allowed to default, German banks would have been in trouble, and probably would have needed to be bailed out by the German government.

Instead, the Irish government chose to guarantee all the banks’ obligations — a commitment it could not afford. Ireland had been running budget surpluses, but now it needed to be bailed out. The German prescription for Ireland, as it would be for the other countries that soon got into difficulty, was austerity. Since they could not devalue their currency, countries would have to reduce wages and raise taxes. Germany categorically rejected the idea of allowing its own inflation to rise, a move that could take some of the pressure off the troubled countries.

That's the part I wanted to point out, but the following bears excerpting as well:

The last several years have been a time of repeated crises, with Germany appearing to be rigid until, at the last moment, it agrees to something to avert disaster without actually doing anything to allow the troubled countries’ economies to grow. [...]

The endgame may be approaching. Troubled countries are facing an increasingly clear choice. They can stay in the euro zone, and face years of endless recession. They can abandon the euro, perhaps bringing catastrophe but giving them the freedom to devalue their new currencies. Or they can accept the German offer: Surrender sovereignty. Accept German leadership and domination of a unified Europe. Then we will bail you out.

If Europe does not accept the offer, and the euro disintegrates, it is hard to know how it will play out. There are, by design, no rules about how the euro zone could be untangled. But after the dust settled, Germany would be among the losers. A new German mark would no doubt be much stronger than the euro is now, making life a lot harder for German exporters. That reality has led some in Europe to think that Germany is bluffing, and that it will continue to pay the bill even if it cannot get what it wants.

That has angered Germans. “A Game of Euro Chicken” was the headline on a commentary by Jan Fleischhauer in last week’s edition of Der Spiegel, the German magazine. “For Germany, being part of the European Union has always included an element of blackmail,” he wrote. “France has been playing this card from the beginning, but now the Spanish and the Greeks have mastered the game. They’re banking on Berlin losing its nerve.”

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