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Eric Reguly

Germany's 'Frau Nein' calls the shots Add to ...

German Chancellor Angela Merkel certainly earned her Frau Nein moniker in 2010. Like a stern schoolteacher, she said no to euro bonds, no to boosting the size of the bailout fund and scolded the euro zone's lesser members for their shabby financial behaviour.

She gave the impression that the 16-country euro zone is largely composed of feckless underachievers who should know better that to jeopardize the common currency. Her message: Smarten up or get lost.

Maybe the lady protests too much. So far Germany appears to have suffered little from the hare-brained economic and financial management of Europe's debt brats - Greece, Ireland, Portugal and Spain. She may be secretly pleased by their troubles, for as Europe's paymaster, Germany finds itself in a gorgeous position to exploit their weakness and reshape Europe on its own terms. The European Union might evolve into German Europe in a few years, and might be the better for it.

Despite the bailouts of Greece and Ireland, the widespread austerity programs and the lingering effects of the recession across Europe, Germany had a terrific year. Growth in 2010 should come in at 3.7 per cent - the best performance since the unification of West and East Germany 20 years ago. Exports are booming. Falling unemployment, rising wages and new investment are pushing up domestic demand. On Wednesday, Munich's Ifo Institute for Economic Research said German companies' access to credit is the best since the financial crisis erupted more than two years ago.

Perversely, the euro zone debt crisis boosted Germany's export performance by driving down the value of the euro, making "Made in Germany" more affordable. Before the 2008 crisis, the 12-year-old euro peaked at $1.60 (U.S.). Today, after a loss of more than 8 per cent in 2010, it's at $1.30. Of course, the price Germany is paying for a more competitive euro is the bailouts of Greece and Ireland. Germany is the single biggest contributor to the €195-billion ($258-billion Canadian) in rescue loans committed so far. Those loans are affordable as long as they are repaid and Germany's economy doesn't go into reverse.

Germany seems to be in a no-lose situation. The euro zone is not damaged enough to hurt Germany's performance, but is damaged enough to allow it to dictate terms. That was plainly obvious throughout 2010, as Ms. Merkel ruled the euro zone's agenda. Virtually nothing of significance happened without her approval.

The bailout of Greece went ahead only after Germany gave it the green light, in May, in exchange for a punishing austerity program (waiting several months to approve the deal was a mistake on Ms. Merkel's part). Later in the year, the Chancellor demanded the amendment of the EU's Lisbon Treaty to include a permanent crisis fund starting in 2013, but one only "to be activated to safeguard the stability of the euro area as a whole." She rejected the enlargement of the existing €440-billion bailout fund and, crucially, insisted that in some cases, bondholders share the pain with taxpayers in future government bailouts.

Ms. Merkel's go-it-alone strategy isn't winning her friends in the weak EU countries. They think her insistence on quick and deep austerity measures is both cold-hearted and risky, because the cutbacks risk plunging some countries back into recession. Others think Germany is a fiscal hypocrite. They note that Germany, in collusion with France and Italy, tried to sabotage, and often violated, the EU's Growth and Stability Pact, which ostensibly limited budget deficits to 3 per cent of gross domestic product and public debt to 60 per cent of GDP. Now Germany is critical of countries, Greece among them, that did the same. Italy and Luxembourg, the prime promoters of euro bonds, resent Germany's outright rejection of an innovative and sensible idea.

Germany seems oblivious to the criticism. It has allies; France, the Benelux countries and Scandinavia are happy to play in the German orchestra. It also has moral authority. EU countries from Ireland to Italy marvel at Germany's growth surge and falling unemployment. They were impressed by Germany's innovative approach to tackling the recession. Many German workers, for instance, were given shorter work weeks instead of being fired and losing their homes. They appreciate Germany's sponsorship of the bailouts of Ireland and Greece. Absent Germany's cheque book, the two countries would have surely gone bankrupt, all but ensuring the early demise of the common currency.

A Europe dictated on Germany's economic and political terms may not be many Europeans' idea of a "union," one with shared goals, interests and vision. But what's the alternative when at least half the euro zone used mountains of debt to sabotage their economies? Germany is making the best of a bad situation. You can hardly blame it for being bossy.

Follow on Twitter: @ereguly

 

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