German hotheads are close to destroying the euro

by Jeffrey Sachs

Financial Times
September 15, 2011

German tabloids and much of European public opinion seem fixated on Greece as an object of scorn. The fact that the Greek government is pushing through the toughest of austerity measures in the face of mass demonstrations seems to be of no import. Yet this aggressive attitude is now putting the euro in imminent peril.

Despite chancellor Angela Merkel’s call for calm, shortsighted German politicians opine that Germany could actually benefit if Greece is forced into default, or even out of the euro. Nothing could be further from the truth. Germany now risks the destruction of its own and Europe’s prosperity if it continues to ignore the interdependence of all of Europe’s economies.

It is to her credit, therefore, that Ms Merkel this week pushed back against her hotheaded colleagues. Even so, Germany’s macroeconomic thinking remains blinkered. Greece is making a bold transformation, from a large primary budget deficit in 2009 to a primary surplus in 2012. The task is considerable. Yes, there has been modest slippage this year, but this reflects the steep recession now hitting the Greek economy.

The critics also seem wilfully to overlook that a European-wide financial panic has swept the credit lines and deposits from Greece’s banking system, and with them the ability of the banks to lend. The economy is thus buckling under an intense credit squeeze, only stoked by the recent talk of default.

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