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doug saunders

Here in the eye of the economic storm you will find what one Berlin analyst calls "a country in a state of denial." Wealthy Germany, perched in the centre of a continent ripped apart by debt emergencies and bailouts, has become the main hope for a solution to the euro crisis.

But it has become apparent this week that the Germans, basking in the strongest economy they've seen in a generation, are avoiding any discussion of the topic, whose long-term consequences have become all but unmentionable in German government and media.

Chancellor Angela Merkel's silence has frustrated French and European Union leaders, debt-troubled coastal nations and many economists, who say that an end to the crisis will come only with strong German involvement and a unified European economy. But domestic politics and looming elections have turned Germany into a non-participant - some would even say a hindrance to reform.

Ms. Merkel delivered a New Year's message praising the troubled euro, introduced in 2002, as the bedrock of her country's economic miracle. As countries to the south and east spent the year courting bankruptcy and enduring painful rescue packages, Germany saw its strongest economic growth and lowest unemployment in 20 years, its exports exceeding those of the United States.

"Germany mastered the crisis like barely any other country - We achieved what we resolved to do: we even emerged strengthened from the crisis," Ms. Merkel told Germans over the weekend, but warned that Europe "is in the midst of a major test. … We must strengthen the euro."

But behind the scenes, other European leaders are furious with Ms. Merkel for refusing to begin negotiations toward creating a closer economic union among the 17 countries that hold the euro as their currency.

Most European leaders and economists now agree that the only way to stop the crisis and prevent future pools of debt from accumulating in Europe's periphery is by creating an economic union that will allow budgets and financial policies of euro-holding countries to be co-ordinated. Without this "fiscal federalism," it seems almost certain that the euro zone will lose member countries - a prospect considered catastrophic by both wealthy and poor countries.

But the topic of tighter economic integration with weaker European neighbours is nearly unmentionable in Germany.

"The problem is that you can't say this in Germany, we can't mention the larger fiscal problem, this is a taboo argument," said Ulrike Guérot, head of the Berlin-based European Council on Foreign Relations, who has attracted criticism for suggesting that Germany has an obligation to the poorer European states.

"In Germany we can talk about Greece and Ireland and Portugal being lazy and undisciplined and having too much debt, but we can't say that this debt was created by our banks and exporters and that our prosperity was built on profiting from this imbalance. …We financed the party, and now we need to get out of it together - that argument is missing entirely. We are a country in a state of denial."

None of the leaders of the largest parties have dared discuss a European fiscal solution, for a looming political reason: This spring, they will face five important regional elections in Germany's conservative south that will be a severe test for Ms. Merkel's troubled Christian Democrats. Talk of German responsibility for the European catastrophe - and the expensive proposition of a budget linked to those of Greece and Spain - is poison to voters.

"Now we are in a situation where the crisis in Greece and Ireland, and the discussion of the future of the euro zone forces us to go that next step, to having a fiscal policy on the European level - that, to my opinion, is unavoidable," says Cem Ozdemir, who as leader of the opposition Green Party is the only German candidate to discuss fiscal federalism openly.

"Unfortunately, Ms. Merkel doesn't have that same kind of enthusiasm - she fears the southern voters too much to face Europe's crisis."

A month ago, it briefly seemed as if European leaders had come together around a solution to the crisis.

The European Union last year set up a bailout fund, the European Financial Stability Facility, designed to restructure the debt of troubled countries in exchange for budget-cutting measures. It was, in essence, a last-ditch mechanism designed to protect German banks - which hold the largest share of troubled European debt.

But this did not address the euro's underlying problem: That as a currency shared by strong exporters such as Germany and import-driven economies to the south and east, the currency is bound to produce trade imbalances that will result in large accumulations of government and private debt in the periphery, leading to more bankruptcy crises in the future.

Ms. Merkel briefly seemed to acknowledge last month that this larger problem needed to be solved.

"We have obviously been discussing the issue of an economic government for a long time," Ms. Merkel said during a summit in Brussels three weeks ago. "What we are currently envisioning goes yet another step in this direction."

But after she made those remarks, her government parted ways with Paris and Brussels, and refused to consider anything other than an extended bailout scheme for countries that have already entered a crisis.

France and the European Union are seeking a central "economic government" which would use the European Council to determine the budgets and economic policies of euro zone countries, ensuring that trade imbalances are smoothed out and debt does not pool up in the peripheral countries. It is a radical measure, ending the budgetary autonomy of countries in the 17-member euro bloc, but most members consider it the only viable alternative to the currency's collapse.

But German officials indicated, in plans leaked from the German Finance Ministry in late December, that they won't accept such an arrangement. They want euro zone nations to pledge strict limits on government debt, to be imposed by 2016, and the existing bailout fund to be enlarged - in short, a package to protect German banks after problems arise.

While some observers here feel that Ms. Merkel's position may become more open to compromise after the spring elections, that may prove to be too late. On Wednesday, Portugal will attempt to borrow several billion euros on the bond market, a key test that could lead to another debt crisis. And Spain, a far larger economy, will need to restructure some 400 billion euros of debt this spring. If the lack of a Europe-wide solution leads investors to panic, the result could be a crisis serious enough to force Germany out of its slumber.

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