Cameron to tell Merkel she is the only person who can save the euro - Europe - World - The Independent

Cameron to tell Merkel she is the only person who can save the euro - Europe - World - The Independent


So, one of the few posts that I will actually make a remark or two about.  I don't think it takes a PhD in Political Science to have predicted this.  However, I have been privately arguing that the bailout of failing Euro Zone economics by Germany can go only so far before the bailouts began to hurt the German economy.  Most of the bailouts are supported by the German government, or in other words, the German tax payer. 

Let me regress back to 2002/2003.  As many of you may recall, to say that the German economy was struggling since 1990 would have been the understatement of the year.  Several socio-economic pressures were faced by Germany: the reconstruction of eastern Germany after unification, coupled with a sever recession during the mid-1990s and a high social welfare burden that the German government was obliged to cover.  Unemployment in Germany exploded to 11-12% by 2003 under Chancellor Gerhard Schröder.  Even under the Social Democrats and Greens-led governments of Schröder (1998-2005), there was a realization among politicians that the welfare state and economy needed much need reforms.  As part of Schröder's reform efforts, the government began to cut taxes to encourage growth and hiring, i.e., business and personal income taxes (2000 and 2003), and reform the economic and social welfare structures through the Agenda 2010 reforms (2003). These reforms became the basis for the German economic recovery that were carried through Chancellor Angela Merkel's governments.  

Today is a different matter.  The German economy has recovered, unemployment is relatively low and the German government has the ability to bailout EU.  The reforms of the past decade have positioned Germany to remain a strong world economy for years to come.  However, there are challenges to this. 

With the increased burden that the German government has undertaken to support the Euro through bailouts of Greece, any additional obligations that the German government would accept would create additional pressures that could eventually swamp any ability of the German government to salvage the Euro.  According to some observers, Greece is not the only country in trouble. We are starting to see similar problems in Italy, Spain, Portugal and Ireland. 

It is possible that Germany could prop up one or two of these economies, but for how long? And would any of the citizens of these countries be willing to go through austerity measures that Germany required of Greece? If not, what will happen if their economies collapse? Lastly, how long is the German electorate willing to support Merkel's bailout of these economies?  There are early signs that the current Merkel-led conservative government will not continue after the 2013 elections, which could bring about a second Merkel-led grand coalition and the Social Democrats have indicated uneasiness of continued bailouts. If the German economy even slips into a new recession, that will most certainly hurt any future bailout efforts.  

Why do I mention all of this?  It comes to down to additional strains to the German economy and where the strains are coming from.  The main problems with the German economy during the 1990s and early 2000s were internal in nature that could mainly be solved by the Germans.  However, the threats to the German economy are more external now since so many German banks are tied to these failing EU economies.  Overall, these external issues will be more difficult for the German government to solve.  Without the funds, or even reduced funding, these EU economies will most likely collapse and the aftermath will be messy, not just for Europe, but for the world economy.  The moral of this commentary, as the German economy goes, so will the European economy. 

Pax,
Mark