Thursday, 9 February 2012

The Paradox of the EU

Merkel Voter Backing in Germany Climbs to Highest Since 2009

So reports Businessweek and so it is.  This represents the paradox of the EU and of the Euro crisis.

Germany is making a feast out of the problems of the periphery countries.   Such problems help to keep the Euro much lower than it would be if there were no euro crisis and this makes German exports super competitive.  Furthermore the flight of capital to safety means that Germany is saving hand on fist billions of Euro through lower interest on its national debt, just when problem countries are forced to pay more.

The paradox is that while such policies make Merkel very popular at home with unemployment at its lowest and consumer confidence at its highest,  it presents her with a conflict of interest.  What is in the interest of Germany is not in the interest of the whole Euro area.    Germany is in fact causing instability to the Euro system as much as Greece.  Only that Germany's instability comes from the virtuous side whereas Greece's comes from the vicious side.  But instability it is just the same.

Soon, pretty soon I would say,  Merkel would have to decide about such conflict of interest.  She depends on her home voters for democratic credentials, but at the same time she dictates matters on the whole Euro front.  Something has to give and pretty soon or the system will blow up.   Forcing additional austerity on countries like Greece who are already suffering from a harrowing economic contraction is cruel and totally detached from the consequences of a Euro blow up that could result from more austerity.

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