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. Mel

    Personally, I think the days of buying bonds for day to day spending must end. It is a form of procrastination, putting off till tomorrow the bills of today. Economies got away with this in times of growth, but its fundamental flaw is shown up whenever economies stall and debts outstrip the ability to service debts. I think this practice must end also for social and moral reasons, when governments borrow to put "food on the table" today, it is the next generation of children who foot the bill, while also supporting a growing population of pensioners. Balance the books, borrow only to invest, should be the mantra of the next generation of politicians.

    November 5, 2011 at 11:09 am | Reply
  2. JoeTexan

    A friend of mine who is a professor at The University of Texas and from Greece told me that it is true that the Greeks refuse to pay taxes because the politicians steal all the money. I'm sure that the hardworking northern europeans don't want to hang that albatross around their necks. Alan Greenspan said the Euro might survive as a northern european currency, but they wont

    November 5, 2011 at 11:20 am | Reply
    • JOE

      Politicians in this country steal the money as well. How do you think that Harry Reid became a millionaire on a government salary?

      What is Obama doing right now? Where did Solyndra's money really go? Did any of it go back to one of Obama's off-shore bank accounts?
      OUR TAX dollars that Obama gave to the unions that was then "donated" to Acorn to fund the "Occupy" rioters, was that done as a means to distract to voters to not watch what Obama was really doing TO US?

      We the people need to start asking questions. What are OUR politicians really doing TO us?

      November 6, 2011 at 11:22 am | Reply
  3. Rui Soares

    I live in Portugal. And I think it's quite obvious that a strong Euro only makes everything worse for a small economy like Portugal. On the other hand, we're making the kind of reforms that will make the portuguese economy stronger in the long run. And if we had an easy solution like a weaker currency it would be harder to reform.

    We're also going to default. With the interest rate at 5% and an inflation of 2%, with problems in economic growth for the past decade and future budget deficits, our debt will just increase above 100% GDP. We can't manage our current debt without future bailouts. And a negotiated default.

    We have borrowed money for too many years to live better than we could afford. Now we have to buy less stuff from Germany and other countries, because we just have to increase our exports and decrease our imports.

    We also need a weaker currency. But we have the same currency that Germany has. And that sucks... Germany will decide...

    We do have some resources. Our exclusive economic seazone is according to Wikipedia the 20th largest in the world. I had read it was the 11th. And we do have a history that should provide us with the confidence to believe that we can do better.

    November 5, 2011 at 11:50 am | Reply
    • Marco

      I agree with you a 100%. Nations will survive. We can't FORCE any country to produce/consume cars or tanks or guns.

      November 5, 2011 at 1:57 pm | Reply
  4. KS

    I am very surprised that Germany and France are not blamed of "breaking" (not following) Maastricht Treaty and set bad examples.

    November 5, 2011 at 12:14 pm | Reply
  5. SHOCK

    >>> In Greece, as in war. To burn cars, a war with police in Athens, demonstrators wearing masks attacked embassies and banks. View exclusive of
    7plus7. net

    November 5, 2011 at 12:42 pm | Reply
  6. RonM2011

    I recently (Oct) was in several parts of Greece and Turkey as a tourist.
    I asked several people in Greece what the problems were with the economy, they all answered that their government had no plan, the one they presented would change sometimes several times in two days.

    They all complained that the government would take a larger chunk of their income. The cabdrivers that hired out at 30 to 50 Euros per hour to take tourists around said they could not live with the loss of income, but their was no meter running, so do you think they reported their income?

    Turkey on the other hand, their cab drivers would take you places for the meter charge, which almost always ran to what the hotel said it would cost, much lower than in Greece. Prices were very reasonable at restauraunts and stores, but the knock on them was that the EU was afraid of admitting a muslim country into the EU.

    We were treated better as tourists in Turkey than Italy, Germany, or Greece. Turley is a growing economy, Fareed is correct in saying what do the Greeks produce.

    November 5, 2011 at 12:48 pm | Reply
  7. chris

    well, how about the turks buy the greek islands to raise cash, it was theirs for over 500 years anyway. next, in return let turkey enter the EU. two problems solved at once.

    November 5, 2011 at 12:53 pm | Reply
    • Marco

      Stupid Nazi

      November 5, 2011 at 1:52 pm | Reply
  8. BradKT

    Globalization is the problem here. Each nation should be responsible for its own currency and economy. The currencies and economies of several nations should NEVER be linked. That way, if a nation like Greece fails, that only affects Greece and who ever was stupid enough to loan them money. That the risk of the free enterprise system.

    November 5, 2011 at 1:15 pm | Reply
    • JOE

      You are absolutely correct. The concept of a World Government is definitely one of the problems. The other problem is that the people are being fooled into believing that a Socialist form of government is THE way to go. They couldn't be more wrong. Socialism is all about Control. Control of all business. Control of all the people themselves.

      I don't know about you but I really don't want to live as a slave to anyone. Once you become dependent on a Socialist government, you become a slave to that government. You have NO rights. You have NO options.

      November 6, 2011 at 11:15 am | Reply
  9. Marco

    Germany's economy is already starting to fading. No more willing Italian, Greek, Irish, Portuguese, Spanish, French customers to buy their products and most major corporations (like SIEMENS etc) spreading the disease with 'under the table' money

    November 5, 2011 at 1:50 pm | Reply
  10. Robrob

    The EU has Greece, we have Mississippi and West Virginia. What are we doing to compensate that they aren't?

    November 5, 2011 at 2:10 pm | Reply
  11. Marc

    Mr. Z – not very ground shattering an opinion piece here. You basically summarized some of the sentiments the editors of The Economist have opined for weeks now. Bravo.

    November 5, 2011 at 3:23 pm | Reply
  12. Peter Q Wolfe

    The way that I look at it is that Euro would have to pass this hurtle or fail eventually. There were no enforcement mechanisms in place and hence the problem with centralized planning like the EU. So, the Euro being the currency different as it may be in membership shows that the greeks should have never joined the EU and further membership should be scrutinized from head to foot. The greeks should be forced to pay their debts back and exit the Euro as fast as humnanly possible. Also, my GTA from Greece admits the credit ranking and false assumptions of plush benefits were unsustainable snd should have been counteracted like the tax cuts in 2001 under Bush like the Economist said.

    November 5, 2011 at 5:16 pm | Reply
  13. Kornelia


    Indeed, on the surface it looks like Germany is strong, unemployment is down and the German economy seems to be doing well.

    The sad truth is very different. Since Merkle has been Chancellor, Germany has turned in to a 2nd world country. Slave labor runs rampant in Germany, where people have to work for private companies for free, or for the infamous one euro job, where people are forced to work for 1 euro (about $1.30) an hour and can't earn more than 400 euro per month. And we think that we have it bad. . . .

    Slave labor is how Merkle drives down unemployment numbers and demoralizes her people, when in reality any one over 40 can't find a decent job in Germany, because the jobs are occupied by slave labor, which private industry naturally backs up 100%.

    People in Germany have to drive micro mini cars, as the price of gas continues to go through the roof, at current Germans pay $9+ per gallon.

    Merkle and her posse have destroyed the once solid German economy, driving the German people in to poverty and despair. The situation there is sickening and sadly the Germany all once knew has been long gone. . . .

    November 5, 2011 at 6:03 pm | Reply
  14. Jacob

    Fareed Zakaria is one of the best analysts around. I almost always agree with his assessments, and when I don't agree, I often go back and reevaluate my position. This reevaluation doesn't always change my original assessment, but sometimes it does. And even when I don't change my position, I never find myself thinking Dr. Zakaria doesn't know what he is talking about. I'm looking forward to his program tomorrow on how to fix the US education system.

    November 5, 2011 at 7:00 pm | Reply
  15. spalmajr

    There are some really good comments but I don't believe that anyone has touched on the real issues and why I think stopgap measures won't work.
    To begin with, Greece does not have a diversified private sector. Therefore severe austerity measures like those that were agreed to create more problems than they solve. Why? Reduction of government spending cannot be absorbed by the private sector. So, a drastic hit to government spending will further reduce Greece's GDP; not to mention add to its social problems. Which creates an environment for radicalization. That's one aspect.
    Cloaked in this bail out Greece story is the Eurozone's real intent which to save the banks. There are a couple of thoughts. First of all banks have been buying Greece's debt for its high yield-currently over 20% compared to German bond yields that are on the order of 1.4%. Greece's debt crisis is not a revelation it been know for well over 5 years so lenders took a risk but want themselves indemnified although they were collecting a premium on Greek debt instruments. Boy, if only we as individuals could do that – make risky investments without bearing the risk. That's a fact. Secondly, even after the bailout, Greece will still be faced with a high debt service – meaning that a large part of their annual budget will go to creditors and unavailable to grow their economy.
    If the EU was serious about helping Greece, I think they should move ahead with the 50% scalp, liquidate all outstanding Greek debt by issuing a Eurozone bond that would carry a low interest rate, and require Greece to place in escrow, regular installments with the Central bank to meet the debt service and retire the bonds as they mature. Finally, work with Greece to coordinate its fiscal policy with EU monetary policy. It's a real shame what's happening Greece. But, if you're going to help them – help them and don't just let them continue to bleed but more slowly.

    November 5, 2011 at 7:59 pm | Reply
  16. momo0828

    I am of the opinion that EU and the Euro was conceived for the explicit purpose of “propping up”, those countries that were flat out broke. After all I find it curious that Great Britain, a country that personifies Europe itself, did not participate in this charade called the European Union. Anybody that had some understanding of economics could see that this disaster was bound to occur over time. These countries existed longer than the US and they still were unable to develop any type of economy that rivals that of the US. That alone should tell any economist that that evolution of the Euro was feeble attempt to stave off the disaster that is Greece today. There is no doubt that had the Euro not been enacted many years ago, Greece’s economy would have failed a long time ago and it will still fail in spite of this of this so called deal; but the collapse would not be as dramatic because everyone is now well aware and prepared for that potential.

    November 5, 2011 at 8:54 pm | Reply
    • Seo

      "Great Britain, a country that personifies Europe itself"
      What?! They don't even refer to themselves as European. They always talk about their relationship "with Europe". When their Prime Minister goes to a meeting on the continent their media says "David Cameron at a meeting in Europe". They demand the most exemptions from different aspects of the EU, they have a different vision for the EU than any other member. In fact if you had to choose an EU member who LEAST personifies Europe itself it would be Britain, and they'd be d*mn proud of that too!

      November 5, 2011 at 9:55 pm | Reply
      • Scott

        Actually Seo, I am in many ways proud that Britain is the leader of the EU awkward squad. The House of Commons is a bear pit, and our press are like a pack of wolves, hence our politicians are used to being berated and being told exactly what is thought of them, but much of the rest of Europe is not used to this abbrasive style of politics.

        Nigel Farage is great viewing on youtube.

        In terms of linguistics and culture, Europe is the most diverse continent on Earth, hence as an Englishman I find the word "European" pretty much useless as an identifier beyond geographical terms.

        November 6, 2011 at 6:34 pm |
  17. nicemusic77

    Thank you Fareed, that was probably one of your best articles I've ever read.

    November 5, 2011 at 9:33 pm | Reply
  18. CDaeda

    Germany save Greece? Who will save Germany when needed?

    November 5, 2011 at 11:43 pm | Reply
    • Jacob


      November 6, 2011 at 12:37 am | Reply
      • San Go

        Absolutely correct, Jacob and CDaeda. I wonder when these people learn to come out of old imperial thoughts. They are not see the fall of Europe ! Their share of 500 years of imperialism – political, physical, economic, cultural, is over.

        November 6, 2011 at 1:18 am |
  19. Kareny

    Problem is the eurozone countries still haven't implemented adequate fiscal policy coordination. Therefore, they'll have to address the problem they're having now with maybe portugal or italy

    November 6, 2011 at 1:04 am | Reply
  20. Jeremy

    Greece and Portugal have a much deeper problem hence I do not share the optimism. In Portugal, amazingly staying out of the media frenzy is implementing drastic cuts (austerity) and will be dividing up state assets for to be sold off to foreigners. However, still more amazing is that poor, fringe country like Portugal in this dire situation STILL is not even whispering the real problems, let alone reforming any of the issues which got them here in the first place.

    Cutting and slashing budgets, raising VAT to 28%, cutting services to those who need them most (but not military budgets!) while ignoring completely the urgently needed reforms is a recipe for disaster.

    In short, I do agree that the Eurozone design is badly flawed, but unfortunately for all of us, most importantly countries like Greece and Portugal, I see no evidence of anything fundamentally changing. Sound familiar?

    November 6, 2011 at 4:03 am | Reply
  21. PAOK

    Because everyone is using the say that Greeks are lazy, according to eurostat, Greeks have the most working hours per week in Europe and their salaries are among the lowest. How do you perceive that you smart americans?
    Learn to read and search..

    November 6, 2011 at 4:49 am | Reply
    • someoneblue

      that is simply NOT TRUE! Germans work more hours per week and the retirement age of greeks is among the lowest in Europe!!! their salaries as well as the pensions they get are much MUCH higher than of e.g. Eastern European countries who are in the Eurozone. These countries still live in absolute poverty and had to sacrifice a LOT to be accepted into the Eurozone and now they are supposed to bail out a country full of lazy corrupt people who protesting against cutbacks and wont move a finger in order to stay into the Eurozone because they think that richer countries will bail them out anyways because they have to...

      November 6, 2011 at 6:15 am | Reply
      • JOE

        The unions in this country are trying to do the same thing. They want to make sure that the absolutely insane demands placed on our job creators either run those job creators out of our country OR simply close up shop so that the people can become depends of the socialists in our Federal Government.
        The unions have been directly responsible for causing jobs creators to move overseas than any other source in the entire country. Of course they won't agree with that. They certainly don't want their dues payers to know about that.

        November 6, 2011 at 10:41 am |
    • JOE

      Have you ever been to Greece? I have and I don't think the Greeks are lazy. Many, of course have become dependent on the government for all kinds of freebees just like they do right here in the USA.
      You hear that, in the United States, only 50% of the population doesn't pay any income tax. Why is that? Are they members of the Professionally Unemployed who demand that they get paid $1,500.00 per child for each illigitimate child they can produce? Are they the ones (not the only ones of course) who are abusing Medicare and Medicaid that our taxes pay for? With both Medicare and Medicaid providing health care for all in this country, WHY do we need Obama Care? Are there things in that bill that nobody wants you to know about? Stealth taxes, for instance? What are the Socialist REALLY trying to do TO US?

      November 6, 2011 at 10:50 am | Reply
  22. iC

    So Greeks are the only ones evading taxes (and I just LOVE the generalizations...they're so heartwarming)? So I guess this ad is just there for the sake of it, right?

    November 6, 2011 at 6:40 am | Reply
  23. Saurabh

    Farid Zakaria is Anti – Western.

    November 6, 2011 at 6:57 am | Reply
    • JOE

      He is anti-anything that has to do with freedom and free enterprise. He wants to create a totalitarian regeime where HE is the emperor that answers to nobody.

      What is it that people don't understand about these despots?

      November 6, 2011 at 10:36 am | Reply
  24. JiminNM

    Not a forum where you can tell the truth if the moderators support the one world gov.

    November 6, 2011 at 8:40 am | Reply
    • JOE

      Jim; If you believe in one world government, I would like to invite you to live in North Korea where you can get real feel of what it is like to live in a socialistic totalitarian country. Enjoy your trip.

      One world government, especially one led by the United Nations, is a farce beyond imagination. You need to grow up, open your eyes and get a grip on reality.

      November 6, 2011 at 10:35 am | Reply
  25. JiminNM

    This forum does not want the participants educated by the truth. The light of truth may be hidden by a cover or dimmed by a shade but it cannot be extinguished.

    November 6, 2011 at 8:42 am | Reply
  26. Dan

    It is not about Greece, it is all about Italy. Who cares if the socialist wet dream of a EU flies apart. Wall Street should know by now who and how they will be bailed out.

    November 6, 2011 at 10:17 am | Reply
    • JOE

      Excellent question Dan. France and Germany have already said NO to Italy and Spain. Their demonstration of a Socialist government has made it impossible to bail these two countries out. The price tag is simply too high.

      If Obama and his Fascist Socialist buddies continue on their efforts to destroy our national economy, we will also be too big to get bailed out. China is already complaining about our debt levels. Obama, of course has deals with his union buddies that need to be paid for. He wants YOUR tax dollars to pay for those deals. Is this what you really want? Hope not.

      Let's vote these turkeys OUT of office in November 2012. Our country simply can not afford them any more. We need to "CLEAN HOUSE" in our State and Federal governments. We need to allow our country to gain back all that it has lost over the past three years.

      November 6, 2011 at 10:30 am | Reply
  27. JOE

    Greece is demonstrating WHY Socialsim is not a good path for ANY country – including the USA.

    Of course, those who believe that they deserve support from the government simply because they live here will refuse to understand this concept. Those of us who work for a living and actually pay our taxes understand it all too well.

    We need to vote the Socialists OUT of our State and Federal governments as soon as possible before they destroy our country and our way of life. We simply can not afford socialism. Neither could Greece.

    November 6, 2011 at 10:23 am | Reply
  28. Martin

    Can they save them? Probably. The question really becomes "Does Germany really WANT to save Greece"?

    November 6, 2011 at 1:42 pm | Reply
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