The German Factor in Greece's Crisis (Part II)

I believe it was both fair and reasonable for Germany and others to insist on a long-term and detailed austerity program from Greece before releasing funds.

It is true that these measures will depress the Greek economy in the short term, but that had to happen sooner or later anyway, and the sooner it is done, the sooner Greece will get back on a sustainable path.

But Germany and others who are asking for these severe measures to be adopted by Greece now should recognize that the obligation to follow a common economic policy within the eurozone applies to them too.

It should not be forgotten that one of the first countries to break the original eurozone rules on government borrowing was Germany itself. In fairness though, Germany got itself back in line — without having to get financial help from other members.

More importantly, all EU countries already have an obligation under EU treaties to treat economic policymaking as a matter of common interest. Germany has benefited from being in the euro by having a more competitive exchange rate than it would have had if it retained the deutschmark.

If Germany were still using the deutschmark, and had had the big trade surpluses and high savings rate which Germany now has, the mark would have risen dramatically against all other currencies in Europe — and German exports would have become too expensive for other people to buy.

Thus, being in the euro has helped German exports and boosted savings in Germany. A large portion of these savings, those that were not invested at home, were invested in Greek bonds (and in other PIIGS markets).

Why? Because Greece and the others were using the euro, and there was none of the exchange risk that might have applied if the German banks had bought, say, Turkish bonds instead.

This is why it is in Germany's own interest that Greece should neither default on its debts, nor leave the euro. That would hurt German banks — and that, in turn, would hurt the finances of the German federal and state governments.

Countries like Germany also benefit from being in the euro in promoting their exports, because the eurozone provides an enlarged home market in which their exporters face no extra costs associated with having to be paid in different and volatile currencies.

They are paid in their home currency, the euro. Their exporters also benefit, as stated earlier, by having a more competitive exchange rate than they would have had if they were still using the mark.

For these reasons, the help being given to Greece by the other eurozone countries should not be portrayed as some sort of charity, but as a loan that is being extended in the rational self-interest of both the lender and the borrower.

After all, the overall medium-term financial position of the countries of the eurozone is strong.

But will it be enough? Will the Greek system crack under the strain? If it is not enough and if Greece, or some other eurozone country, needs to come back again for more loans because it has difficulty borrowing commercially, will the remaining eurozone countries then be prepared to use their credit a second or a third time to help out the country in difficulty?

My sense is that there will be a willingness to help out again, so long as in the meantime, strong and enforceable arrangements have been put in place at the EU level to ensure that all eurozone members run their economies properly — and that deep-seated structural and competitiveness issues are tackled vigorously by all members.

Editor’s Note: Part III of this feature will be published on The Globalist on Monday. Read Part I here.