To Rule the Euro Zone

By Theil, Stefan | Newsweek International, January 31, 2011 | Go to article overview

To Rule the Euro Zone


Theil, Stefan, Newsweek International


Byline: Stefan Theil

The unified currency was supposed to limit German power. Now the Germans are in charge--and no one is happy, not even the Germans.

"For every tax receipt that's not collected," goes a joke making the rounds in Athens these days, "the Germans will shoot 10 hostages." The acrid humor is but the latest proof of division in the European Union, a grand project that was conceived to make possible the harmonious cohabitation of many peoples who have, through history, hated each others' guts. The euro was created as the currency that would unite the continent, but having pushed Europe toward an abyss, its eye-catching bank notes can no longer paper over ancient grievances.

When the EU gave bankrupt Greece a [euro]110 billion bailout last May, under adamant orders to slash spending and raise taxes, distraught Greeks looked back to an earlier era of foreign diktats. Since it was Germany's chancellor, Angela Merkel, who pushed for the toughest conditions, the mayor of Athens drew up an [euro]80 billion invoice for the Wehrmacht's occupation of Greece during World War II. Deputy Prime Minister Theodoros Pangalos fumed that the offspring of Nazis had no right to issue orders to Greeks. The left-wing Athens daily Ethnos wrote that the Germans were turning debtor countries like Greece into "colonies of the Fourth Reich" and all of Europe into a "financial Dachau."

To compare financial assistance from Berlin to a concentration camp is, of course, of dubious logic and execrable taste. But Europe's escalating debt crisis has taken a heavy toll on civility, especially in the ire directed at Germany. In Ireland, Spain, and Portugal, many blamed Merkel for fanning the crisis when she warned in November that insolvent countries might never pay back all their debts--an inescapably logical observation, but one that, when spoken plainly, spooked the markets. "The Germans never change," French President Nicolas Sarkozy muttered to his advisers during a meeting in Brussels when Merkel wasn't as forthcoming with her country's money as he had hoped.

Of the many conceivable reasons Germany has become the object of Europe's resentment, the euro is at the top of the list. To put it bluntly, the weak euro has meant a strong Germany. In fact, the weaker the euro, the stronger Germany becomes. No country in Europe has emerged as powerful and self-confident as Germany has from the currency's crisis. In 2010 the German economy grew by 3.7 percent, the fastest rate of any Western nation. Unemployment, having fallen for 10 months in a row, is at the lowest level since 1992. "The average German never even noticed the crisis," says Thomas Petersen, a veteran observer of German public opinion at the Allensbach polling institute. Andreas Rees, an analyst at UniCredit, Italy's largest bank, calls Germany's performance "one of the most mind-boggling economic turnarounds" in history, and Berenberg Bank's Holder Schmieding predicts a "golden decade for Germany"--even as the rest of the West continues to struggle. On top of all that, Germany's federal budget deficit is on track to reach zero by 2014, where it's projected to remain thereafter. Robust growth, rising employment, and a disappearing deficit: what wouldn't President Obama give for any of those?

The real source of Germany's current political clout is that it's the spider in the web that holds Europe's single currency together. Decisions on whether the economies of Greece, Ireland, Portugal, and Spain survive or collapse--indeed, decisions about the future of the euro itself--are made in Berlin more than ever, says Charles Grant, director of the London-based Centre for European Reform (CER). "Everything depends on Germany now," he says. "Europe is dancing to Germany's tune." Germany has the largest and strongest economy, the deepest pockets, and the most solid AAA credit rating of any major European economy. Even Europe's No. 2, France, is judged by bond markets to be a potential problem. …

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