Skip to main content

German Chancellor Angela Merkel attends a news conference after talks with Peru's President Ollanta Humala at the Chancellery in Berlin, June 12, 2012.THOMAS PETER/Reuters

The euro might be the best thing that's ever happened to Germany.

It's sparked soaring exports, a manufacturing renaissance and near-zero interest rates.

But as Greek voters get set to vote in a pivotal election Sunday and financial contagion threatens to spread beyond Spain, the world is looking to Germany to dig much deeper to save the common currency, because only Germany can.

Even as leaders from across Europe join together to fix the continent's financial mess, efforts are failing to bring much needed confidence. Moody's sharply downgraded its rating of Spanish government debt late Wednesday, just days after euro-zone finance ministers pledged €100-billion in loans to stabilize Spain's teetering banking sector. The loans will only add to Spain's debt load as it struggles with a weak economy, Moody's noted.

As Europe's woes mount, eyes turn to the continent's one financial powerhouse.

How Germany – Europe's largest economy – came to hold the fate of the euro in its hands is Economics 101. Fiscally lean and economically strong, only Germany has the financial clout to write more bailout cheques for the euro zone's faltering siblings.

"Any solution requires the agreement of the Germans," said Patrick Leblond, associate professor at the University of Ottawa's graduate school of public and international affairs. "There's no way to bypass them on any of this."

And while the calculation should be an easy one for Germans to make, the decision to put more money on the table is achingly slow and deliberate in coming.

Germany's economy soared, almost from the moment the euro was born in 1999. Freed from competitive currency devaluations, its borrowing costs have dropped. And 13 years later, nearly 70 per cent of its exports go to the rest of Europe, providing a foundation for its manufacturing industry. Germany also stands virtually alone among Western countries in maintaining a trade surplus with China, buoyed by exports of such items as sophisticated manufacturing equipment.

All that would be put at risk if the euro zone splinters or dissolves.

Experts say the impending Greek vote marks a perilous inflection point in the euro-zone debt saga. Either Germans give more, and soon, or the system begins to unravel.

"It's overwhelmingly in Germany's economic self-interest to provide trans-European financial stability," insisted Janice Stein, director of the Munk School of Global Affairs at the University of Toronto.

But a complex mixture of history, politics and the collective psyche of the German people has turned a no-brainer decision into a soul-searching exercise.

Germans have a "visceral discomfort" with the whole notion of going into excessive debt, fearing that it will spur potentially dangerous inflation, Ms. Stein explained. The country's fixation with austerity dates back a century, she said.

"[German Chancellor] Angela Merkel has a very limited time to change her position," said Ms. Stein, who has visited Germany a handful of times in the past year. "She's inching her way forward when the markets need a strong statement to restore confidence. She may have too little, too late, to offer."

Germans' debt aversion is rooted in its experience of the early 1990s, when the country bankrolled the reunification of East Germany to the tune of a trillion dollars. That forced painful restructuring for the economy, including labour reforms. It also made Germany more productive and economically stronger.

Many Germans feel they paid their dues to reach the top of the European economic hierarchy, and they want their southern European neighbours to make deep sacrifices to stay in the club.

But the austerity bug goes back much further than reunification. The current generation of German political and business leaders was schooled on the lessons of the Weimar Republic and the hyper-inflation of the early 1930s. And many worry that taking on huge debt to save Greece, Spain and perhaps Italy could trigger a bout of inflation.

Mike Moffat, an economist and lecturer at the University of Western Ontario's Richard Ivey School of Business, said he can't figure out if Germany is playing a high-stakes game of "chicken" to extract deeper sacrifices from Greece, Spain and the rest of the euro zone, or whether it's given all it can.

Either way, the fate of the euro zone is in Germany's hands, he said.

"They really are the only large country left with any money. They really do hold most of the cards."

Few Europeans would be spared if Germany fails to act. An analysis released Wednesday by Credit Suisse warns of a disaster for European banks if the single currency dissolves, wiping out nearly 60 per cent of their value and sucking about 10 per cent of available credit out of the system.