Why Germany's Rescue Plan for European Debt Is Doomed

More

Germany's Parliament voted today to approve a $185 billion contribution to $1 trillion bailout plan designed to calm the debt crisis sweeping through euro-zone states. Many analysts doubt that the emergency fund will help troubled countries like Greece avoid defaulting on their debt. But the fund could buy time for Greece to manage an "orderly restructuring," whereby it would agree to pay current boldholders a certain fraction of the promised loans. (Read an explainer of the Greek debt crisis here).

The bailout is horribly unpopular in Germany. But that's a little ironic, because it's ultimately designed to save not only Greece and Portugal, but also the entire European Union. It's essentially a bailout for the euro. And no European country benefits from the euro's regime more than Germany.

The common take on Europe's mess is that Greece's debt crisis might be Europe's problem, but surely it's Greece's fault. The EU didn't force Greek tax evaders to be evasive. It didn't force the government to regularly spend 50% of GDP while it collected a little more than a third of domestic product in taxes. The country got drunk on its own red ink. It made its own hangover, right?

Well, Steven Pearlstein spins things differently. The problem isn't just the profligate peripheral states like Portugal, Italy and Greece. The problem is at the heart of Europe, both metaphorically and geographically speaking. The problem is Germany.

To understand why, you have to understand the German economic machine. Follow the money. Germany is Europe's leading exporter of goods. It runs a huge trade surplus, which means more money is coming into the country than going out. That should make wages rise, along with the currency value, and Germans should spend their valuable income on products from other countries, shrinking the trade gap. But that's not happening. Germany's currency cannot adjust with respect to its European trading partners because they're all on the same currency. The euro is strangling Germany's neighbors, who need to devalue their currency so that wages and prices can up to 20%. But it's also keeping Germany's trade surplus alive.

Here's Pearlstein:

What Germans won't accept is that they wouldn't have been able to sell all those beautifully designed cars and well-engineered machine tools if Greeks and Spaniards and Americans hadn't been willing to buy those goods and German banks hadn't been so willing to lend them the money to do so. Nor will they accept that German industry was able to thrive over the past decade because of a common currency and a common monetary policy that, over time, rendered industry in some neighboring countries uncompetitive while generating huge real estate bubbles in others.

What's the solution? Well, we'll need more than an emergency plan. We'll need extraordinary action on the part of the European Central Bank. We'll need the ECB to stop worrying and learn to love expansionary monetary policy. Pearlstein says the European Central Bank needs to do something like the US Federal Reserve did in late 2008: bring down interest rates and buy up assets, like Greek bonds.

Jump to comments
Presented by

Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

Get Today's Top Stories in Your Inbox (preview)

The Death of Film: After Hollywood Goes Digital, What Happens to Movies?

You'll never hear the whirring sound of a projector again.


Elsewhere on the web

Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register. blog comments powered by Disqus

Video

The Death of Film

You'll never hear the whirring sound of a projector again.

Video

How to Hunt With Poison Darts

A Borneo hunter explains one of his tribe's oldest customs: the art of the blowpipe

Video

A Delightful, Pixar-Inspired Cartoon

An action figure and his reluctant sidekick trek across a kitchen in search of treasure.

Video

I Am an Undocumented Immigrant

"I look like a typical young American."

Video

Why Did I Study Physics?

Using hand-drawn cartoons to explain an academic passion

Writers

Up
Down

More in Business

Just In