Reality check

I can say with absolute confidence that Angela Merkel is not the most popular person in this neck of the woods. From the Greek perspective, EU policy seems to be more of a German diktat, and a hostile one at that. But in Germany this sentiment is is seen more as ingratitude. There is a huge gap in perceptions. So here are two pieces that argue that the German view is the one furthest from reality and that its actions are potentially as damaging to itself as they are to the countries of the periphery

First, Simon Tilford argues,

The current strategy for dealing with the eurozone crisis is largely a German one. But far from limiting the risks to Germany, it is maximising them. The German economy is not immune to the economic slump enveloping a growing swathe of Europe. One country after another will need bailing out, with Germany ultimately providing the back-stop. Much of this debt will not be repaid, leading to a dramatic rise in Germany's public indebtedness. Without a mutualisation of risk, the euro will collapse, with devastating implications for German exports (to EU and non-EU markets alike as a euro collapse would hit the global economy hard), the value of Germany's foreign investments, and the stability of its banking sector. These are just some of the direct economic costs; the political fall-out would be grave for Germany. Isolated and blamed for the collapse, it would be poorly placed to pursue its interests through whatever is left of the EU.

Whilst in the Financial Times Wolfgang Munchau speculates on the tactics that could be used by Mario Monti

The point is not so much to call Angela Merkel’s bluff, as some of my Italian and Spanish friends have been urging. She is not bluffing, despite the fact that a break-up of the eurozone would clearly be disastrous for Germany. Joschka Fischer, the former foreign minister, said recently that by allowing the eurozone to break up, Germany would for the third time in a century have inflicted utter devastation on Europe and on itself. 

Those who advocate the strategy of calling Germany’s bluff often assume a degree of rationality that is plainly absent. The Germans have developed a strange narrative of the crisis. Following the debate there, as I do regularly, has a parallel universe feel about it. There is, for example, a denial that the current account surpluses are even remotely a factor.

What both have in common is the sense that a resolution of the crisis will be impossible until German policy makers begin to understand the reality of their impact on the peripheral countries and, most importantly, of the growing risks that austerity poses to Germany itself.