Germany: where the euro problem starts and ends?

May 21, 2010

Germany: where the euro problem starts and ends?

Derek Thomas at the Atlantic takes a direct path toward laying blame for the whole euro-mess at the door of Germany.

"Germany's Parliament voted today to approve a $185 billion contribution to $1 trillion bailout plan designed to calm the debt crisis sweeping through euro-zone states. Many analysts doubt that the emergency fund will help troubled countries like Greece avoid defaulting on their debt.

He ticks off the checklist of offenders (Greek government profligate spending, i.e., the "piigs" of Europe) but says the driving force in the euro has always been Germany, and they are the country that has taken the lead toward this state of affairs, even though they are internally compromised over the entire matter.

The bailout is horribly unpopular in Germany. But that's a little ironic, because it's ultimately designed to save not only Greece and Portugal, but also the entire European Union. It's essentially a bailout for the euro. And no European country benefits from the euro's regime more than Germany.

Interesting that his solution to this debt problem is the perennial solution of the status quo throughout history for nations with similar problems, i.e., create more debt to battle the debt burden already created. If the country survives it is concluded as a success (not that Mr. Thomas says this. But what other choice is there if some version of the status quo is to be preserved?)

...The problem is at the heart of Europe... The problem is Germany.

To understand why, you have to understand the German economic machine... Pearlstein says the European Central Bank needs to do something like the US Federal Reserve did in late 2008: bring down interest rates and buy up assets, like Greek bonds."

Derek Thomas mentions this article by Steven Pearlstein at the Washington Post, which also piles on with the idea the main culprit is Germany (Pearlstein's piece also quotes Martin Wolf, the economics columnist of the Financial Times):

"... the immediate fiscal challenge comes from the decline in tax revenues and the increase in transfer payments that result from slow growth and high unemployment.

In conclusion, the blame is on Germany, and so is a solution of allowing inflationary pain in the "engine" of the EU:

"...The reality is that the price of avoiding a dangerous deflationary spiral in Greece and Spain is allowing inflation in Germany to rise to 3 or 4 percent. "