Debt crisis tests German ties to euro

By Anthony Faiola
Washington Post Staff Writer
Wednesday, December 1, 2010; 11:03 PM

BERLIN - The deepening woes of Europe's weakest economies are raising fresh doubts about the euro. But the future of the world's most ambitious monetary experiment will be decided not in troubled Ireland, Greece, Portugal or Spain, but here in Germany - Europe's economic powerhouse.

The Germans surrendered their mighty deutsche mark in 2001, their stalwart economy anchoring a union of 16 European nations sharing a common coin: the euro. But with fiscal turmoil escalating across much of the euro zone, the currency has entered an uncertain period.

Although it reversed some of its recent declines against the dollar on Wednesday amid hopes that the European Central Bank will aggressively intervene to prop up the bonds of ailing European nations, some still fear that the currency could destabilize in the coming weeks and months.

The key question now is: How long will the Germans prop it up? In one poll released this week, almost half of the Germans surveyed said they were growing weary of the euro.

To defend the currency, the notoriously frugal taxpayers here have already had to cover the largest share of the cost to rescue profligate Greece, and, now, Ireland. As pressure mounts for billions more to shore up Portugal and Spain, and perhaps even Italy, Germany's growing tab, analysts say, is posing the greatest test yet to German willingness to remain in the euro union.

It has come down to a numbers game, many here say. Germany, along with the International Monetary Fund and the 15 other nations that share the euro, set up a $1 trillion fund this year to contain Europe's debt crisis and protect the euro. Although the fund may be enough to bail out Portugal and Spain, throwing a lifeline to Italy - the world's seventh-largest economy - would require far more cash. Even bailing out Spain - the fourth-largest economy in the euro zone - could leave the fund so depleted that Chancellor Angela Merkel may have no choice but to go back to parliament here in a highly charged bid for more German support.

Merkel and other German officials have steadfastly stuck by the euro, and most still consider any move to leave the currency highly unlikely. But analysts say Merkel would probably face a surge of opposition if she is forced to seek additional German money to save the euro.

Others say there may be different ways to shore up the currency without more German aid. Nevertheless, analysts say the prospect of a German withdrawal from the euro, an event that probably would doom the currency, is becoming less and less unthinkable.

"I think it is quite politically dangerous for her to go back for more," said Thomas Mayer, chief economist with Deutsche Bank in Frankfurt. "The government has to be careful not to trigger a grass-roots political movement here, like the tea party in the United States, against the euro. You can already feel it."

A victim of success

Germany owes its robust financial health in part to the euro. By sharing a common currency with less-affluent nations in Europe, the manufacturing giant has made it more affordable for the denizens of Madrid, Rome and Athens to buy BMW sedans and Siemens washing machines. Its trade with the other members of the euro zone jumped 31 percent over the past decade, with Germany enjoying a $105 billion trade surplus with its neighbors.

That surplus has fueled a counter-argument that German consumers are not buying enough products in return from the likes of Greece and Spain, worsening the economic imbalances in the region. But given the lack of manufacturing prowess in many of those nations, the Germans are retorting: Buy what?

In fact, concern is mounting that the euro could become a victim of German success. Germany's economy is growing so advanced - and so apart - from the less-dynamic economies in other parts of Europe that it is making less sense for it to be part of a currency union with them, some say.

"The European Union economy is something that Germany has definitely benefited from, but whether it needs the same currency as its neighbors is something that I sometimes have my doubts about," said Frank Schaeffer, a lawmaker from the Free Democratic Party, Merkel's junior coalition partner.

Growing resentment

As Europe goes hat in hand to the Germans, popular resentment has bubbled up. In past months, Germans have canceled vacations to Greece and the media have turned on Athens in protest of the overspending and public corruption that forced it to seek a bailout in May.

Reaction to the bailout of Ireland, approved last weekend, has proved more muted - largely because most Germans consider the Irish relatively industrious folk whose banks unfortunately bit off more than they could chew.

But with fears growing of additional bailouts for Portugal and much-larger Spain, the media here are once again taking up arms. The Bild tabloid ran a headline last week asking the nation: "Do We in the End Have to Pay for All of Europe?"

"Germans work hard and save their money, and why should we just throw it at nations that can't do the same?" complained Rolf Wetzer, 48, a metalwork factory manager who was hunting for Christmas bargains at a Berlin mall this week.

Yet even Schaeffer, a euro critic, said the growing resentment is unlikely to lead to Germany's withdrawal from the euro in the short run. To many Germans, the euro is not just a currency but also a symbol of Europe's post-World War II integration.

In addition, there may be other ways to save the euro. Nations such as Greece could be ejected to safeguard the currency. Or, Schaeffer and others argue, the European Central Bank could step in, printing billons of euros to aid ailing member nations in a manner not unlike the Federal Reserve's move to buy U.S. Treasurys and stimulate the U.S. economy.

Merkel has also been moving to assuage domestic fears that protecting the euro will carry an insurmountable price. The terms for the recent $90 billion bailout of Ireland, for instance, were far harsher than the ones demanded of Greece in May - a warning to other ailing euro members that aid will not come cheaply.

In addition, Merkel has successfully pressed for a measure that could see private bondholders shoulder some of the burden of debt crises in the euro zone after 2013, an attempt to show German taxpayers that they alone will not bear the burden of shielding the euro.

"There is a real sense that the euro is worth saving, in part to ensure peaceful cohabitation among the nations of Europe," said Christoph Schmidt, a member of the German Council of Economic Experts, which advises the government and parliament. "But the Germans just don't want to be the only ones to do it."

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