European Financial Crisis: Eye on Germany

As observers focus on the troubled economies of Spain and Greece, it’s important not to lose sight of Germany.

Background

Germany’s vision of tough austerity and greater fiscal integration prevailed for two years after Greece’s debt crisis erupted in early 2010. Its record of sound fiscal management, moderate growth and low unemployment was seen as a model for Europe.

By the spring of 2012, however, as a wide range of European countries sank into a double-dip recession, a rising chorus of voices challenged this approach, and a number of allies in other countries were weakened or forced from office. Germany was increasingly seen as isolated in supporting austerity instead of stimulus spending to promote short-term growth.

In June 2012, Chancellor Angela Merkel stressed the limits of Germany’s powers to bail out other countries and again rejected joint efforts like eurobonds to pool debt. Behind the scenes, however, Merkel has pressed allies in Paris, Rome and elsewhere to cede more power to Brussels over their national budgets before Germany would agree to provide further backing for efforts to bolster the euro zone. She spearheaded ratification of the financial compact, signed in March by the leaders of 25 of the 27 European Union countries, to control deficits in the long run.

Most recently, Merkel said she was ready to discuss stimulus measures to help Greece restore growth, and expressed her “determination’' to keep it in the euro zone.

Why is Germany relevant when discussing the European financial crisis?

Since Germany is Europe’s largest economy and possesses, in Angela Merkel, its most skilled diplomat, it is the driving force behind recovery from the European financial crisis.

However, Germany has issues of its own – chief among them, an ageing population. It has raised its retirement age from 65 to 67, prompting some Germans to question why they should have to work longer so that other Europeans can retire earlier. Germany also has a historical preoccupation with inflation which has long shaped the European agenda.

Germany is known for keeping its house in order.  Even as it contributed to bailout mechanisms such as the ESFS, it confirmed a goal of presenting a “next-to-balanced budget” in 2014.

Substantial portions of the ‘Background’ section of this article were paraphrased from the New York Times wiki on Angela Merkel. All rights reserved by the original publisher.

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