Germany Makes Its Choice

MARKETS AROUND THE WORLD EXPERIENCED significant losses on Thursday because of different issues: tepid U.S. retail sales, Chinese public efforts to cool off the real estate sector and tighten financial conditions and an apparent computer glitch that caused the fourth largest U.S. corporation, Proctor & Gamble, to temporarily lose approximately 30 percent of its share value in afternoon trading. Indicative of the uncertainty and lack of confidence in the markets was the fact that the Standard & Poor's (S&P) index — a bellwether of U.S. economic performance — dropped a staggering 8.3 percent at one point in the afternoon before closing down 3.24 percent. The global sell-off, no matter what the ultimate trigger, initiated an immediate "flight to safety" (high-quality, highly liquid assets), illustrating the degree of skittishness and uncertainty that pervades the markets. The major factor engendering global uncertainty is the Greek sovereign debt crisis and — by extension — the crisis of confidence in the eurozone. Images of Greek protesters storming the parliament building in Athens have raised a specter of potential collapse of the Greek government, which would precipitate a massive sovereign default that would ripple outward to the rest of the troubled Mediterranean economies and possibly beyond. Furthermore, unsubstantiated rumors in the financial world of a possible Spanish International Monetary Fund bailout and alleged impending German exit from the eurozone further drove market fear that the end is nigh for Europe. Neither scenario is realistic. Spain's $1.6 trillion economy is far too large to be bailed out and Germany has no interest in exacerbating a crisis of confidence in the eurozone that would turn around and impact Germany's own well being. Germany is making its stand in Greece not because it cares about the Greeks, but because it cares about Europe's, and thus its own, economic stability. Which brings us to the central geopolitical issue of the moment, one that currently is driving the action in the eurozone: Germany. German Chancellor Angela Merkel stated it best in her speech before the Bundestag on Wednesday when she said, "This is about no more and no less than the future of Europe and about Germany's future in Europe ... Europe is looking to Germany today." Merkel spoke in defense of Berlin's domestically unpopular contribution to the Greek bailout — valued at 22.4 billion euros ($28.2 billion) over three years — that Germany wants to use to prevent the Greek crisis from spreading to the rest of the eurozone (particularly Spain), thus derailing economic recovery and collapsing the eurozone's fragile banking system. For Berlin, Greece is a systemic risk for Europe that needed to be nipped in the bud. Now it needs to be contained. Germany is also out to prove a point, that it is not going to allow investors — "speculators" as it charges — to make the same bets against European economic solidarity in 2010 that they did against Europe's nascent eurozone project in 1992, causing the "Black Wednesday" attack against the pound, which significantly eroded confidence in the eventual euro currency. Germany is making its stand in Greece not because it cares about the Greeks, but because it cares about Europe's, and thus its own, economic stability. Greece may implode at some point in the process — both because of social instability and an inevitable Great Depression style recession that the draconian austerity measures will cause — but Berlin cannot let Greece take the eurozone down with it. This is why the Germans must make the bailout work — no matter what hurdles (including supposed Slovak domestic politics) appear to be in the way — and keep Greece afloat until Europe recovers, which certainly is not on the near horizon. In the long term, however, the rumor that Berlin is contemplating restructuring the eurozone cannot be completely discounted. The thinking in Germany — even if at a subconscious level — is about where Berlin goes when the immediate crisis in the eurozone recedes, which Germany hopes will happen by the time the Greek bailout package expires in three years. Germany is beginning to contemplate whether the 110 billion euro price tag of the Greek bailout is worth saving an economic (euro) and political (EU) system that may have outlived its purpose. It is inevitable that Germany will begin contemplating alternatives to an economic system that is fundamentally untenable, that attempts to wed 16 fiscal policies and one monetary policy and further attempts to wed Northern and Southern Europe and all their geographic, social, political and economic incongruence. The eurozone has been economically beneficial for Germany, but it is not clear that it requires Southern Europe to continue being profitable for Berlin. This is the line of thinking for a "normal Germany" — as German Finance Minister Wolfgang Schaeuble referred to Berlin's desire to pursue national over European interests — one that is no longer bound by the institutions created by the Cold War to contain the rise of exactly such a "normal" Germany. This is why Berlin will fight to preserve the eurozone in the short term, but may begin to contemplate alternative economic, political and security arrangements as the crisis recedes. But it needs time to design such alternative institutions, and is essentially paying the 22.4 billion euro tab to attain that time. Of course the Athenian street could still derail all of Berlin's plans, both short- and long-term. The protests and rioting introduce a volatile element to the equation, which operates at a subatomic level that cannot be forecast. It is rare that so much is at stake, geopolitically speaking, at such a micro level of activity, where endogenous dynamics can have an unpredictable and yet significant global impact.