Debt crisis

At the financial crisis summit meeting in October 2008, Chancellor Angela Merkel appeared before television cameras to reassure German depositors that their savings were secure, adding that the government would guarantee all private investments.

It was intended to reassure people and to avoid panic - and it appeared to work.

Such a quick and decisive reaction would have been desirable a year later in the case of the Greek debt crisis, according to Thomas Fricke, chief economist at the German-language newspaper Financial Times Deutschland.

Athens could no longer hide the fact that its economic statistics had been falsified, and the risk premiums for state bonds gradually rose higher.

"If the financial bailout package had been put into place at the end of 2009, with a guarantee that we would not allow Greece to go under, then spiraling interest rates and risk premiums could have been avoided," said Fricke.

Too much hesitation

Instead, Fricke said, the chancellor hesitated for months. This was partly with a view to what the electorate might think and partly on moral grounds; it was thought the transgressor should not be allowed to simply get away with it.

"As a result I believe that the German government, despite having good intentions, made the crisis even worse," he said.

A quick decision by the government to back the Greeks was probably made more difficult by a lowbrow media campaign from parts of the German media, says economics journalist Norbert Häring.

"The newspaper Bild, for example, is a market leader and has a great influence here," Häring said, adding that it was difficult to follow a policy so unpopular with the newspaper and its readers.

"The Greeks, and also the Portuguese, were made out to have no one to blame but themselves - which is not at all true," Häring said, claiming that Germany has also contributed to the decline of the peripheral countries.

High export surplus

Häring believes Germany's high export surplus has had a role to play in the developments. Solutions such as costcutting and relying on exports might have worked for Germany, he says, but instead of making the countries at Europe's fringes more competitive they simply led to decline.

"The great difference is that Germany is a preeminent industrial nation. Exports make up 50 percent of our gross domestic product."

In the fringe southern economies the proportion is half as much, or even less, Häring maintains. "This means that becoming a bit more competitive has much less of an impact for the southern countries than it does for us," he said. Conversely, domestic markets were badly hit as incomes went down.

A little generosity would do no harm

For this reason, Häring argues, accumulating savings is not enough. He would prefer to see more support for the debt-ridden countries to build up their industrial sectors. To make periphery nations more attractive, such countries should be allowed to introduce lower corporation tax rates - but he says the will is not there.

"You only have to look at how difficult it was for Ireland to defend its lower rates,” said Häring. When Ireland sought to maintain lower levels of corporation tax during the negotiation of its debt rescue package last year, it came under pressure from France and Germany to raise the levels in return for lower debt interest rates.

Essentially, Häring maintains, if Germany would give up a little of its industry, it could prevent Greece and Portugal from losing any industries they already have.

Debt-stricken countries 'punished'

Even the 700-billion-euro permanent bailout mechanism, to be introduced in 2013, is against market logic, according to Fricke. Markets react quickly, he says, while the bailout decision process involved a long decision process.

"As soon as a country enters a bailout process that is so long, it fuels market speculation," said Fricke.

In Fricke's view, Germany's stance is that debt-stricken countries are being rightly punished for their financial predicament and must pay a price for any help they receive.

This attitude, and the approach to solving problems that it's based upon, should change, according to Häring. If not, he says, the eurozone could become a so-called "transfer union" with an industrialized core, including Germany, supporting a weak periphery. Another possibility is the end of the euro itself.

"It could be that the pain in Greece becomes so great that a political party is formed there that is in favor of leaving the eurozone," said Fricke.

"Public sentiment could be so great that the country could indeed leave. To avoid that we would then have to support Greece and pay to make sure that it stays."

Author: Zhang Danhong / rc
Editor: Martin Kuebler