Germany's Eurozone Dilemma (Portfolio)
Video Transcript:
Video Transcript:
The current crisis of the Eurozone is the result of the imbalance of economic power between countries at the core of Europe and countries in the periphery. The crisis has a financial solution -- the constant transfer of funds from the center to the periphery.
However, Europe's main challenge is not economic, but political. The solution that makes more sense from an economic point of view could be unacceptable from a political perspective for most of the key actors of the crisis.
The European Union faces a basic dilemma: countries in the eurozone periphery are unable to overcome the crisis by themselves within the limits of the common currency. The combination of high debt, low growth, aging population and loss of competitiveness means that the Eurozone periphery needs money from an external source. That source has to be Germany.
To keep the Eurozone alive, Germany will have to support sustained financial transfers to the periphery. So far, Germany has accepted to provide some help to Eurozone countries in distress. Berlin has done so by agreeing on bailout funds and by accepting the European Central Bank's purchase of sovereign bonds from the countries that face high bond yields.
Germany has been asking for austerity policies and institutional reforms in return for its financial assistance. This system is now facing serious tensions -- both within Germany and at the European level. The first reactions to Germany's plans happened in the countries that were requested to implement austerity. In countries such as Greece, Spain and Portugal people protested against spending cuts in pensions, salaries, health and education.
As the crisis lingers, the reaction to austerity has reached the European core. In France, the population chose Socialist candidate Francois Hollande as their new president. Hollande campaigned against Germany-driven austerity and asked for growth measures in response to the crisis.
The reaction against austerity has now reached Germany. In the two regional elections that were held in May, Angela Merkel's Christian Democratic Party was defeated by center-left parties. The opposition criticized Merkel's push for austerity -- both in Germany and in Europe. The German opposition actively supported Hollande's campaign in France and asked for a similar political shift in Germany.
This leaves Germany in a delicate situation. Berlin knows that, in order to keep the Eurozone alive, a greater amount of German money has to be transferred to the European periphery. But Merkel also has to explain to German voters why their money should be transferred to peripheral countries with little financial discipline. Germany will have to find a way to tell its voters why it needs to subsidize the European periphery. This national debate will occur regardless of which party is in power in Germany.
A eurozone fully subsidized by Germany would make sense from a financial point of view, but it could be unbearable for populations both in Germany and in the Eurozone periphery. Germany could then propose that all countries transfer more sovereignty to Brussels. The outcome of this process would be a Federal Europe with a weaker Germany. This alternative may be more tolerable for the European periphery, but would limit German leverage over the Eurozone.
At the center of these debates lies the question of national sovereignty. The core and the periphery of Europe will then have to decide how much they are willing to compromise in order to find a way out of the crisis. The answer to this question will not be the result of an economic analysis -- it will be the result of a political calculation.
