The Germans are the Atlas of the Eurozone and the French may be Adding to their Burden

Posted by PITHOCRATES - December 4th, 2011

Week in Review

The French and the Germans are carrying the weight of the Eurozone.  Sort of like a family.  Where the Germans are the hard-working adults.  And the French are the successful children with good jobs but living over their means.

Children being children, they want more of the same good times.  The parents, who have experienced true hard times, believe more in thrift and hard work.  So it’s natural that the French and Germans have different views on how to  handle Greek debt.  The French say let’s just print more Euros and monetize it away.  The Germans say, what?  Are you crazy (see A Culture Clash by Veronique de Rugy posted 11/28/2011 on The New York Times)?

First, the perceptions of the consequences of monetizing the Greek debt differ across the Rhine River. It is well known that Germans hate inflation. It is deeply rooted in their psyche. Part of Germany’s official theory is that Hitler came to power because of the disastrous consequences of the hyperinflation of 1922-1924 during the Weimar Republic. The French, on the other hand, have no such fears. On the contrary, ignoring how inflation chipped away their capital, my parents’ generation often fondly remembers paying their house “grace à l’inflation” during the 1970s.

Second, the official government debt and deficit numbers of France and Germany are substantially different. The Organization for Economic Cooperation and Development projects Germany’s debt at 87.3 percent of G.D.P. with a deficit of 2.1 percent of G.D.P. —possibly sustainable levels. However, France’s levels of debt and deficit are higher and unsustainable (debt of 97.3 percent of G.D.P. and a deficit of 5.6 percent of G.D.P.).

Third, attitudes toward reforming social programs differ too: in recent years. Germany has engaged in significant structural reforms to tackle the rigidity in the labor market as well as demographic pressure on the private and public pension system. France, however, has been reluctant to change any “acquis sociaux,” France’s famous social entitlements.

With higher levels of debts and no will to reform entitlement programs, sooner or later France is likely to need a European Central Bank “bailout” to keep paying its bills (and French banks may also be in big trouble). The need for a rescue plan makes France more inclined to set a precedent. However, Germany, after 60 years of desperately trying to avoid inflation, is reluctant to pay that bill.

It’s going to get tough in the Eurozone.  For Germany, that is.  Not only are they the responsible adults living a life of thrift and hard work, they’re children may soon be moving back home.  This on top of trying to save the rest of the Eurozone.

Poor Germans.  The Atlas of the Eurozone.  The only question is will they reach their limit?  And shrug off this crushing weight?


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