Germany's Financial Conversion -- Leaders Undergo a Change of Heart, Pledging to Assist Ailing Neighbors

By Craig Whitlock
Washington Post Foreign Service
Thursday, February 26, 2009

BERLIN, Feb. 25 -- Germany is the world's leading exporter and fourth-biggest economy, but during the global financial meltdown, it has also been among the most tightfisted. For months, German leaders have warned that spending and lending huge sums to fend off recession -- such as the United States' $787 billion stimulus package -- will backfire in the long run.

In recent days, however, German officials have had a swift change of heart. With customers around the world no longer in a buying mood, BMWs and other high-end German exports are rapidly piling up on the docks. Analysts predict that Germany's economy could shrink this year by 5 percent, the worst contraction among Europe's economic powers, prompting authorities here to consider large infusions of money to prop up struggling European countries.

Last week, Finance Minister Peer Steinbrueck, who in September derided the financial crisis as "an American problem," said for the first time that Germany would intervene, if necessary, to prevent a fiscal default by other countries that use the euro. "Collectively, we will have to be helpful," he said.

Three days later, Chancellor Angela Merkel, who had repeatedly stated that Germany would not bail out struggling neighbors, said Berlin was now prepared to do just that by organizing rescue packages for Eastern Europe through the International Monetary Fund. "If help is needed, we are ready," she said.

Few countries are as politically and culturally averse to debt as Germany. Ever since the days of the Weimar Republic eight decades ago, when hyperinflation ruined the economy and led to the rise of the Nazi Party, Germans have been dedicated savers who eschew credit cards and mortgages in favor of old-fashioned cash.

In recent years, as other European countries spent freely and saw their property and financial markets boom, German lawmakers raised taxes and cut popular welfare programs so they could balance the federal budget. Today, Germany's public finances are the healthiest in Europe -- but now the country is being called upon to pay for the sins of its undisciplined neighbors.

Otto Fricke, Budget Committee chairman in the lower house of Parliament, said the idea of foreign bailouts is unpopular among many Germans. The political timing is also terrible, with national elections set for September.

"People say, 'Why do we have to give other countries money when we ourselves have trouble?' " he said.

But Fricke said Germany had a moral and practical duty to assist neighbors that, until recently, have gobbled up German exports. Lawmakers, he said, are also coming to the sobering realization that some core European markets -- Italy, Ireland and Greece, for example -- are grappling with severe fiscal problems that could lead to a regional meltdown if Germany did not help out.

"Right now, nobody knows how much money you have to put into what country," he said. "That really makes us a little bit afraid."

On Sunday, Berlin hosted a summit of eight European countries to discuss ways to rescue ailing members of the European Union. Leaders of the eight countries called for a doubling of the IMF's balance sheet, to $500 billion, in case the fund receives more emergency requests for aid.

Though the E.U. leaders did not specify who would pony up the money or where it might go, officials are worried that several European countries might need a bailout if the global economy continues to deteriorate.

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