Zakaria: In defense of German sluggishness
German Chancellor Angela Merkel.
November 4th, 2011
06:59 AM ET

Zakaria: In defense of German sluggishness

By Fareed Zakaria, CNN

It is ironic that Greece - a tiny economy that is a mere 2.2% of the Eurozone and not even among the top 25 economies in the world - has produced so much turmoil. But there has always been a fundamental flaw in the design of the Eurozone. Europe created a single currency without adequate fiscal policy coordination. Very competitive economies like Germany were joined together with uncompetitive economies like Greece.

Nevertheless, I remain cautiously optimistic. This is because, despite what many critics say, Germany is playing its cards right. Many argue that Germany should come up with a dramatic solution to the debt problem.  Chancellor Angela Merkel is not leading, critics charge. I disagree. Germany has a good reason for being sluggish.  It is trying to force countries like Greece to enact meaningful reforms.

The German concern is that if they come up with some dramatic solution to the euro crisis, such as guaranteeing everybody’s debt, financial panic would end but countries like Greece and Portugal would feel no pressure to undertake necessary reforms. These countries would not get their budgets in order; they would let their fiscal houses continue to crumble; they would not become competitive.

All of Germany’s leverage would evaporate the moment it wrote the check to its neighbors. Indeed, a couple of weeks ago, Germany watched as the European Central Bank responded to a financial scare in Italy by intervening.  The situation stabilized. Then the Italians immediately began watering down their commitments to enact economic reforms. This is Germany's nightmare.  It's what they're working so hard to avoid. Understandably, Germany is trying to force as much real reform out of debtor countries as possible before writing checks or making guarantees.

Germany is doing this not just for sound economic reasons.  There are also political motivations. Angela Merkel couldn’t do it any other way. The German taxpayers would revolt if she suddenly guaranteed the debts of countries like Greece. They would feel like they were falling into the same trap that caused the problem in the first place. For these reasons, you’re not going to see dramatic action from Germany.

What you’re going to see instead is some complex solution that places pressure on Greece and other countries to reform while at the same time reassuring markets that Germany will not let the euro fail. This is understandable and sensible, but it will not satisfy the markets, which want a simple, clean solution. For this reason, the Germans are flirting with disaster. What is likely to emerge is a complex, incremental solution. The markets will have to learn to accept it.

The part that I worry about is that even after all of this, Greece is probably not salvageable.  It has too much debt and, fundamentally, it is not a competitive economy. It doesn’t make anything anyone wants. This is not true of Spain or Ireland. Spain and Ireland are quite dynamic economies that got hammered by the financial crisis. So the real question is whether there is some way to ring-fence Greece from the rest of Europe. Perhaps then there’s a scenario in which the Germans guarantee all remaining debt.

The truth is: Greece has defaulted before. There’s a book out that says that since it’s independence in the 1830s, Greece has been in default for 50% of its national existence. The difference is that now the Germans are willing to bail the Greeks out. That’s what’s new.

Europe is trying to create a greater, integrated economy. And this project has gone on for 25 years. For 25 years, everyone has said it’s all going to collapse. But it doesn’t collapse. In fact, far from collapsing, Europe has gotten in some ways larger, stronger and deeper. Now this crisis is clearly the biggest challenge Europe has faced. And Europe has reached this point because the currency was badly designed.

I can’t be sure Europe will get through this mess. My best guess is that, eventually, the solution will come from the European Central Bank (ECB). Like the U.S. Federal Reserve, the ECB has a lot of power and leeway.  If it just started guaranteeing or buying various kinds of debt, it would be able to stabilize the euro. And that’s also politically more palatable.  If the German government has to “recapitalize the ECB” that sounds much better in German than saying “we’re going to bail out the Italians” - even though effectively it is the same thing.

On the leadership of Greek Prime Minister George Papandreou, I actually think he’s trying to handle this in a pretty responsible way. He has accepted huge budget cuts – cuts that, frankly, no American politician could ever accept or enact. The Greeks have gone through two rounds of huge budget cuts. They are proposing a third round of these budget cuts.  But Papandreou is also a politician and he recognizes that his political situation was getting very difficult. And he saw that the opposition party was acting incredibly irresponsibly by opposing the terms of this European bailout and so he called their bluff. The whole point of the referendum was to say to the opposition, “Fine, if you want to oppose this deal, then you take responsibility for the fact that Greece will be thrown out of the Eurozone.”

Papandreou's bid worked. He called the opposition's bluff and as a result the opposition backed down. Overall, I think Papandreou has handled this in a pretty clever way.

Interestingly enough, as a footnote, the leader of the main opposition, Antonis Samaras, and Prime Minister Papandreou are not just people who know each other. They were roommates in college in Amherst in America. Today they are going through this titanic tussle in Greece. You have to wonder what it’s like to be acting out a great drama on the world stage with your college roommate.

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Topics: Debt Crisis • Europe • From Fareed • Germany • Greece

soundoff (296 Responses)
  1. GreekAmerican

    Now I know why Zakaria is Anti-Hellenic, Zakaria was born in Mumbai (then Bombay), Maharashtra, India, to a Konkani Muslim family.[3] His father, Rafiq Zakaria, was a politician associated with the Indian National Congress and an Islamic scholar. It cannot be expected that a muslim would say anything good about an Orthodox Christian nation. He is 100% biased and against Greece. It can always be seen when he bashes Greece and Greeks. He onced called Greece a basket case. As if india is the WORLD CAPITAL of ghettos !

    November 4, 2011 at 5:38 pm | Reply
  2. Lars Steinglen

    CNN should fire all of its talking head infotainers and put Fareed Zakaria on 24/7. It's like Albert Einstein hanging out with the frat brothers of Faber College's Delta house.

    November 4, 2011 at 5:40 pm | Reply
  3. tcaros

    Who cares? NOBODY cares about this fake emergency.

    November 4, 2011 at 6:02 pm | Reply
  4. Greek Greek girl

    It is a fact that Greeks are very hard working people and see things in a very different way. Everybody has problems with controlling their finances. Debt is part of economies of every country. Greece just happens to be an easy target, stop bullying Greece.

    November 4, 2011 at 6:42 pm | Reply
  5. KirbyS

    Someone explain to my WHY anyone should bail out Greece. We are again bailing out BANKS, If they took the risk they should fall. Is the rest of the world the Bank of Last Resort for every speculative investor who cries when they buy bad paper from a profligate country with disastrous economic policies. Let Greece fail and work it out themeselves.

    November 4, 2011 at 6:47 pm | Reply
  6. Obama Bin Badagin

    Only by sending the 12th Army back in.

    November 4, 2011 at 6:57 pm | Reply
  7. Gopherit

    It seems absurd that Greece, with a minor economic role to play in Europe as well as world wide, supposedly could bring down much of the developed world's banking and economic systems by defaulting. If that is the reality then it is the banks which have lent to a country with a dodgy record, obviously to enhance their bottom line. It resembles the U.S. situation which came to a head in 2008 with the dodgy packaged "investments" schemes and so caused the possibly contrived meltdown which resulted in the U.S. government, ultimately courtesy of U.S. taxpayers, rewarding malfeasance with bailouts, many of which subsequently were used to further enhance banks' bottom lines. Apparently Europe is headed in the same direction.

    November 4, 2011 at 7:01 pm | Reply
  8. Krishnan

    Great piece Fareed. You write so well.

    November 4, 2011 at 7:08 pm | Reply
  9. StructuralProblem

    Funny that the two countries that created Greece from the Hellenes, Great Britain and Denmark, are not involved but that Germany is involved even though it was the Bavarian administrators that nearly ran the country into the ground over a century and a half ago. Like another country created from the Ottomans, Greece will be a problem until they see themselves as a responsible member country and take care of their own issues.

    November 4, 2011 at 7:16 pm | Reply
  10. Paul

    Germany has had massive trade surpluses with Greece, Spain, ireland, etc., because easy credit helped their exports and their effective control of the euro guaranteed Germans hold the winning hand. If Greece were allowed to inflate their way out of their debt by printing more euros, (much like the US is trying to do with the dollar) there would not be a problem. Don't get me wrong, Greece's gov't spent too much and taxed very little, but the Germans are not innocent in this game. Further, these bailouts are helping German and French banks much much more than they are helping Greece. After all, these are still interest bearing LOANS, they are not GRANTS, so let's save all the heroic German taxpayers angry at lazy Greeks talk. PS The USA forgave German debt after World War 2 and gave them the Marshall Plan now THAT was heroic.

    November 4, 2011 at 7:30 pm | Reply
  11. frootyme

    Let China and India bail out Greece.
    US should think and fix the laws on how to stop and next Wall street scandal. This week it was MF Global which declared bankruptcy. Unless the financial terrorism ends, this economical wows will not be fixed. It was Enron's Ken Lay & Jeff Skieling then scamsters Bernie Madoff & Raja Ratnam then Goldman Sachs's Rajat Gupta then Satyam's Ramalinga Raju and now John Corzine of MF Holdings. All the living monsters from this list should be paraded naked in the streets of NY.

    November 4, 2011 at 7:46 pm | Reply
  12. Nicholas

    Mr. Zakaria, you are watching things from afar and only seeing the macro picture. The Greek Govt. has made very slim efforts to cut useless spending (mostly cut public works) and even that was done in a counter-productive way (slashing all public sector salaries, from the largest to the smallest at an equal percentage), at the same time governing in an amateurish way at best. Your critique of the main opposition party is correct. There are signs that some Greek MPs are starting to revolt against their party leaderships and will impose a turnaround towards a more serious and responsible way of doing things and running the country. I hope it's not too late...

    November 4, 2011 at 7:46 pm | Reply
  13. Francis

    Yet another misinformed article relying on stereotypes about 'Northern' versus 'Southern' Europe. Just a few facts to rectify some misconceptions:

    1. The Danes of Swedes do not work more hours per week than people in most Southern European countries
    2. Italians: 58 million of them, no natural resources ... and still the 8th largest economy in the world ... it does not happen by being lazy
    3. Italy again: an average GDP per capita above the EU average
    4. Germany: wealthy, yes, but partly because benefiting greatly from the euro, which makes their exports much cheaper under the euro than with the Germany mark. So, let us keep that in mind when wondering why they are so keen on keeping the eurozone together
    5. the UK: bigger budget deficit than several southern European countries ... (Italy will have a balanced budget next year, running a primary surplus)
    ..
    .. etc ... etc.

    CNN and commentators ... let us stop relying on facile generalizations, which help no one. And let us pinpoint to the real problems (no growth in Italy, for instance).

    November 4, 2011 at 9:10 pm | Reply
    • Roland

      If you look long term then it's highly unlikely to see growth in the euro zone and the reason is there are no babies being born.Germany's population is projected to shrink in the coming decades same in Italy and Spain.Without workers the GDP will drop as a concequence.And the only people the EU is able to attract as migrants will be low skilled workers from the Middle East and Africa and Europeans really (REALLY) do not want to let them in.So decline is really the only thing out there longer term.Unless measures are taken to increase the birth rates.One of the best ways to do this is to decrease benefits because the state in Europe in many ways has taken over the role of the family in Europe.You used to go to your brother or your father if you had money problems.Now they go to the state for welfare checks.Old people get state pensions etc, used to have to depend on children.

      November 5, 2011 at 12:11 am | Reply
      • Roland

        One could also switch some of the benefits towards mothers (or fathers) to raise children full time and get paid for it from those reduced general welfare benefits. So that couples have a strong financial impulse to have children.Sort of like how in the USA people with little chance of getting employed get drafted into the army we in Europe need an army of mothers (fathers) to have and raise children.

        November 5, 2011 at 12:22 am |
      • Francis

        Excellent points, Roland. Aging population is a real problem and one of the key to low growth. Mothers not working is another problem ... incentives are needed for all these things, and then you will see some growth.

        November 5, 2011 at 9:15 pm |
  14. @helloathos

    Check out this sketch comedy video about the Greek economy... http://goo.gl/J2lD2

    November 5, 2011 at 2:46 am | Reply
  15. Adam

    Disgusting. The Greeks have bought and pampered their way into a mess and expect someone to bail them out. It's not fair that the Germans work much harder and have less welfare than the Greeks yet still have to bail them out.
    Still, the US is making the same mistakes as Greece. Thank God we're not in the Eurozone.

    November 5, 2011 at 2:48 am | Reply
    • Remford

      Yeah, well... unfortunately we're also not very different, and fiscally-responsible states like North Dakota, Wyoming, and Iowa are going to wind-up having to subsidize California, Illinois and New Jersey JUST like the Eurozone, and just as much taxation without representation.

      November 5, 2011 at 4:22 am | Reply
  16. Remford

    Greece may comprise 2.2% of Eurozone productivity, but it represents one HELL of a lot larger portion of its overall debt – especially when how much it's able to repay is taken into account.

    November 5, 2011 at 4:20 am | Reply
  17. FJ

    Germany is once again in a position of strength. They are winning the third world war of economic strength. They should not write a blank check until the failing countries make an honest effort to change the way they run things. The german people owe no one anything, some mention the war that has been over for 70 plus years, everyone suffered, those who are strong are once again the ones that were back then.

    November 5, 2011 at 4:29 am | Reply
  18. Thomas

    Nice article and a good reminder as to why holding pat can sometimes be the right thing to do.

    November 5, 2011 at 7:44 am | Reply
  19. Nah

    One again Fareed got it (or chooses to get it) all wrong. 1. One of the main reasons that Greek economy failed is because Germany used the Eurozone to serve its own interest (i.e. strong euro = good for export economies, bad for turist economies) 2. Having wrecked the Greek economy Germany is now picking up the pieces (i.e. various high-value state and private companies that, because of the crisis are ridiculusly undervalued). 3. The prolonged agony of the Greek crisis makes Greece and all other "failing" economies more pliable. Germany is using the panic to impose what in other context would be seen as pure neo-colonialism.

    Now if many of your readers choose to view the Greek crisis through the purely racist view that "Greek are lazy", that is their problem, but is partly due to shallow analises such as your own, that insist on presenting Germany a the "Good pupil" and the PIIGS as sunbathing leaches.

    November 5, 2011 at 7:52 am | Reply
    • Chris

      Actually, this is why the eurozone and the EU were always going to fail. The member countries are too disparate in their culture and their economies. They need to either stop playing this song and dance of a united europe or just drop the facade and actually forge into a single country, wherein they WILL all be responsible for keeping each member state afloat.

      November 5, 2011 at 6:19 pm | Reply
    • Cameron

      NAH: If Germany is really just pushing people around with the Euro, then how come most economists think that Germany would have been better off with the all-powerful Deutschmark?? That doesn't make a lot of sense. Germany will always be the dominant European country (Russia excluded), but they probably weakened themselves by joining the Euro. And how is bailing out other countries 'neocolonialism?' That's just pure ignorance - coming from a former colony, I know better than to throw that word around.

      Anyways your post just sounds like you're afraid of the Germans, which is pretty strange, given that they're a relatively benign, generous country full of hardworking people. The Greeks? Well, they don't pay taxes, don't work too hard, bribe each other frequently... and that whole 'Mediterraneans are happier' BS won't work here - people in Italy, Turkey, Greece, Spain aren't very happy - I've been there, and many of them are just as sour as any German or Czech.

      November 5, 2011 at 10:26 pm | Reply
  20. Christopher Dycha

    There is certainly a crisis that must be dealt with soon. However, throwing buckets of money at a problem does not solve the root cause and backsliding will be imminent. Thinking closer to home, whenever there is a person in severe need and a helping hand is offered, unfortunately, we become the ones that enabled that situation to fester. Reform and cultural change is the only way to ensure sustainability. Unfortunately, it requires an honest effort from the recipient. For the sake of the entire economy:good luck. Christopher Dycha

    November 5, 2011 at 8:30 am | Reply
  21. Mickey

    They were greedy because EU added countries did not qualify to be in eurozone and they wanted to expand the trading area. I think this problem need to be solved sooner than later and it is better to lose some money now than more in the future. Some small european economies can not be saved inside the EU. Those economies need to be healed out of the EU. It is a pity but it is a true. Only few european economies are healthy and they have been trying to mislead for some years people and investors and that is the reason this debt is affecting them and driving crazy. What i do not understand when EU lose the aim veryfing fiscal policies, i used to remember before expansion that was a main topic and they were stick to it.

    November 5, 2011 at 8:48 am | Reply
  22. Mohammad Farooqui

    Fareed good analyses focus inside Europe but this the time to think outside the box. Economic problem in Europe and US will continue whole like last decade and once you have problem then it is visible only from weak economies. Whole decade will continue like this. there is no permanent solution. I will be happy if somebody .'Emerging scenario type of experts' gives his analyses.

    November 5, 2011 at 8:55 am | Reply
  23. Matisse533

    Fareed's right on the money...the old adage "No Pain, No Gain" applies. Kids/People/Nations will all fudge it, kick the can down the road, until they have to face reality, and change. Generally speaking, we only change when forced to. We are talking about changing the welfare psychology of an entire culture. This culture was weaned on the expansion and largesse after the war years. Only through blood, pain and revolution does change come about. We have to earn it. And the piper must be paid.

    November 5, 2011 at 9:21 am | Reply
  24. Econ Scholar

    Mr. Zakaria,

    While I agree with your analysis, would it be too much to ask for proper attribution? Sentences like "There’s a book out that says that since it’s independence in the 1830s, Greece has been in default for 50% of its national existence" read sloppily and shortchange the scholars that actually do the hard work on which you feed. Let me rewrite that for you: "In their book "This Time is Different" (Princeton University Press, 2009), economists Carmen Reinhart and Kenneth Rogoff show how Greece has been in default for 50% of its national existence". There, it is not that difficult.

    November 5, 2011 at 9:49 am | Reply
  25. Martin from Germany

    Yes, Papandreou was very clever. The moment i get the defibrilator of my chest i will thank him for this nice little surprise in so many four-letter words... Reminds me of that guy in the former German Democratic Republic who didn't read the memo right and caused "the wall" to fall in the end. Interessting times, indeed, like in that chinese proverb...

    November 5, 2011 at 9:55 am | Reply
  26. YorkyRoyal

    I really like this article, very well written. Bravo, Mr. Zakaria.

    November 5, 2011 at 10:00 am | Reply
  27. ZweiStein

    Let's remember this when our North American governments propose to establish one currency for Canada, USA and Mexico.

    November 5, 2011 at 10:14 am | Reply
    • JOE

      Let's hope that doesn't happen. Canada and Mexico would be drowning in debt.

      Obama would be happy though. He may be able to get hold of their money and spend them to death as well.

      November 6, 2011 at 11:28 am | Reply
  28. Basic Economics

    Germany stands to loose in a major way if the eurozone fails. The critical benefit of the Euro to the Germans is that the "drag" of the weaker economies in the Euro has the effect of providing a lower exchange rate vs. the dollar than would be the case if Germany had its own currency.

    This lower "blended" exchange rates helps keep German manufacturing employment and exports high. This is why it slays me every time I hear a stupid American politician whine about a weak dollar. A weak doller is precisely what this nation needs. Regardless on its impact to people's European vacation plans.

    November 5, 2011 at 10:44 am | Reply
  29. arnons

    New global world, heralding the rise of China, a vortex of Islam ... Russia is degenerating itself, but trying to return to control her own resources ... and Europe ??... still alive her film of the past 50 years ... what is happening in Greece and other countries "edge of the continent ", and closer to the center ... precursor seems celebration is about to end .... Conservative and revolutionary forces apparently due to the crisis will grow ... peace and quiet and cultural hedonism, looks a lot less ...

    November 5, 2011 at 10:50 am | Reply
  30. SHOCK

    The best finance minister in Europe gives a prescription for ailing economy of the EU, the U.S. and Greece. He claims that should be reduced by 15% from the municipal office employees.

    Money will be given only for construction and energy. Djankov received an award from Forbes 10 days ago. It is the experts in combating the crisis. View exclusive of 7plus7. net

    November 5, 2011 at 10:59 am | Reply
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