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To stop spiraling euro crisis, Germany must move quickly

To stop spiraling euro crisis, Germany must move quickly
December 06, 2011

ONE WAY or another, Germany and other wealthy economies in the euro zone will have to bail out the weaker ones. And if Chancellor Angela Merkel of Germany wants Europe’s common currency to survive, she can no longer insist that the euro crisis be solved entirely on her country’s terms.

The same concerns about unsustainable debts and public spending that first struck Greece have spread to Italy and Spain, and that uncertainty has in turn clouded the picture even for more stable euro nations like France. But as European Union leaders work frantically to reassure the markets, one key sticking point is Germany’s opposition to letting the European Central Bank act as a lender of last resort to troubled euro zone countries. This looks like a tough moral stance: Why should prosperous Germany spare Italy from the consequences of its own profligacy?

Yet the current euro crisis wasn’t caused only by a lack of discipline by Mediterranean countries; it also showed the flaws in the euro itself. When inflation-wary Germany adopted a common currency with Greece, Italy, and other free-wheeling southern-tier countries, the hope was that German-style fiscal discipline would rub off on everyone else. In practice, it was a mixed blessing for some countries: By holding inflation down throughout Europe, the euro system artificially lowered interest rates for Greece, Italy, and others, allowing their leaders to borrow to their heart’s content.

Germany, meanwhile, has benefited by throwing in with weaker countries; it effectively lowered its own exchange rate – a boon for Germany’s export-heavy economy. Having reaped the benefits of the euro for a decade, Germany also must also be prepared to step in to keep the currency union from falling apart.


So all teed up and……………..

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