German effort to save euro zone comes at a cost

In the course of Europe’s economic crisis, Germany has pushed its neighbors into a new fiscal treaty, demanded that other governments take tough austerity measures, forced losses on private investors who hold Greek bonds and helped shove uncooperative politicians out of office. For demanding that other nations accept that painful medicine, Berlin has paid a price of its own: potentially $600 billion in loans, guarantees and other payments to help keep the euro zone intact. Germany is Europe’s economic engine and the political power at the heart of the 17-member euro region. Without its checkbook, the experiment in a common currency would be doomed, but Germany has too much riding on it to see it fail. The single currency has provided Germany with a ready export market free of shifting exchange rates and other risks. Much of what Germany has offered is in the form of loan guarantees that may never cost the country a nickel and that so far have had little effect on its government budget or credit rating. But if the guarantees ever come due, they could turn Germany into one of Europe’s biggest debtors — and compromise the region’s economic health. The cost could approach perhaps 20 percent of Germany’s annual economic output. German central bank head Jens Weidmann spoke of the risks on Wednesday, saying that efforts to stop the crisis with a “wall of money” were akin to the biblical Tower of Babel. It “will never reach heaven. If we continue to make it higher and higher, we will, in fact, run into more worldly constraints — both financial and political ones,” he said in a speech in London. The final tally of Germany’s commitments should become clear in the next few days when euro-area finance ministers meet to increase the size of the region’s bailout fund. Most euro-zone nations contribute to the fund. But the biggest burden rests squarely on Germany, whose annual economic output of roughly $3 trillion represents about a quarter of the euro region’s total. At the meeting, regional leaders are likely to complete the establishment of the crisis-fighting system that they began in the spring of 2010. They are likely to increase the size of the fund by a minimum of around $250 billion, to more than $1 trillion. Throughout the crisis, Germany has been resistant to bailouts and subsidies. Its opposition repeatedly pushed the region to the brink of disaster — including what Greek officials say was a near default in May 2010 before Germany agreed to an initial bailout. “It has not been cheap to get the consent of Germany,” said Carlo Bastasin, a visiting fellow at the Brookings Institution. He said the price included the ouster of Greek and Italian leaders who had not taken strong enough action to tackle their nations’ debts and harsh austerity measures, such as deep cuts in public spending, in several countries. “The brinksmanship was a precise strategy — and it worked pretty well in terms of results,” he said. In the debate over the size of the bailout fund, Germany argued for months that no increase was needed — and that it might even be counterproductive if it eased the pressure on governments to improve their finances.