Why Germany and Greece are right to blame each other

by Paul Donovan

Financial Times
July 26, 2011

The ongoing epic of the eurozone crisis is by no means over.

Greece will probably selectively default next month (or thereabouts), and then have a pause before properly defaulting (with a debt haircut) at some later date. There are still many other options for crises out there, and politicians will no doubt have many opportunities to create even more.

The central problem in Europe is, as I’ve noted before, that in the long term the euro does not work. The euro has never worked. Economists spent all of the 1990s saying “the euro will not work”. Economists were ignored. Bad things happen when economists are ignored. However, the failure of the euro to work as currently structured is compounding the near term problems that we face by leading to more and more political tension.

To hear the Germans tell it, the solution to the euro crisis lies in the hands of the discipline.

The Teutonic rallying cry of “we must have discipline” echoes around the council chambers of Europe. If only the periphery would knuckle down, raise productivity and lower wages, all would be well. This is exactly what Germany did during the first ten years of the euro’s existence. Germany entered the euro as a very uncompetitive economy. A decade of denial and self restraint later, and Germany was once more restored to the very epitome of competitiveness.

From the Greek point of view, the solution to the euro crisis lies in the hands of Germany.

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