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Merkel must bend a little or risk a total collapse

There are moments in literature and folklore, and occasionally in real life, when kings and queens, princes and statesmen, would dress like commoners and take to the streets to see how the real people lived.

Here's wishing that German Chancellor Angela Merkel would do the same, but not in the streets of Berlin, Hamburg or Dresden. Let her do it in Athens, or Volos, or Kalamata. It would take her a scant 20 minutes among the Greek commoners to realize that the place is an economic torture chamber, and that maybe she is partly responsible for the damage and could reverse it if she stopped being so bloody inflexible.

Three years after the European debt crisis started, Greece is falling apart economically and socially. The streets are littered with beggars and the homeless, and more women are selling their bodies so they can feed themselves and their children. Businesses are struggling or failing everywhere because everyone is short of cash.

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Greece is shutting down. Every government, private economist or banker I talked to in Athens this week said a 10-per-cent plummet in economic output next year is possible, on top of the 20-per-cent fall since 2009. Economists have a term for that kind of decline – depression.

Austerity is not working in Greece. Why? Because Greece was force-fed austerity when it was in an already weakened state, buried to the top of the Acropolis in unsustainable debt and rife with corruption.

A technical government put in place after the resignation of prime minister George Papandreou last year essentially became the lapdog of the troika – the European Union (read: Germany), the European Central Bank (read: Germany) and the International Monetary Fund (sympathetic to Germany). The troika's mania for austerity, and the smothering of sovereignty, was too much for most Greeks to bear.

The Greek parliament is now awash with parties that want to shred the austerity programs. Extreme political parties are also on the rise in other European countries where job-killing austerity is the dominant economic theme.

Since Greece accepted its first bailout two years ago, the EU has used endless crisis summits to try to invent the "bazooka" solution to contagion. Each bazooka turned into a pea shooter. Now the EU is in a genuine panic as Greece slides off the cliff, Italy and Spain slip into deep recession and a slow-motion bank run in the Mediterranean countries threatens to turn into a full gallop, emerging as the biggest single threat to the integrity of the euro zone.

Yet Ms. Merkel won't do what should and could be done to take the edge of the crisis and spare the weakest countries from economic suicide. She continues to preach austerity-for-all. Her government has made it known that Greece's new government is dreaming if it thinks it will negotiate a greatly diluted austerity package. She refuses to back euro bonds, which would pool the debt of the euro zone countries, bringing down the financing costs of the weaklings. She doesn't want the ECB to buy sovereign bonds and she resists the launch of a common deposit insurance scheme, which would be a powerful anti-bank-run weapon (to be fair, she probably fears such a scheme would not pass German constitutional muster).

But the good chancellor might not be able to resist for much longer. She looks increasingly isolated as Italy, Spain and France, now under the control of François Hollande's pro-growth, austerity-lite socialists, beg for new crisis-fighting measures, and less austerity, for fear that the whole euro project will explode.

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There is another reason she might bend, indeed has to bend.. The euro zone crisis is catching up to mighty Germany itself. On Thursday, purchasing managers' indices for the euro zone went into reverse, indicating declining private-sector activity and a new recession setting in. Germany's manufacturing was especially hard hit.

Crisis summit season has returned. Ms. Merkel will be in Rome Friday for a four-country summit hosted by Italian Prime Minister Mario Monti, an increasingly desperate man. Next week is the EU leaders' summit. At one of these summits there has to be a breakthrough. Europe doesn't need a bazooka so much as a chancellor who is willing to ease up on her principles. Maybe she should walk through the streets of Athens incognito before she attends either event.

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About the Author
European Columnist

Eric Reguly is the European columnist for The Globe and Mail and is based in Rome. Since 2007, when he moved to Europe, he has primarily covered economic and financial stories, ranging from the euro zone crisis and the bank bailouts to the rise and fall of Russia's oligarchs and the merger of Fiat and Chrysler. More


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