The Buzz

The European Merry-Go-Round

The euro crisis seems stuck in an endless cycle of bailouts flowing from north to south. The numerous diets Germany has used to keep the monetary union alive have failed to address the fundamental sickness of many of the southern economies. And yet, German chancellor Angela Merkel insists on keeping the euro on life support. Why does this seemingly unsustainable status quo continue to hold?

From its inception, the dramatic disparities in economic strength across the euro zone were bound to create an unhealthy boom-and-bust climate, with creditors and debtors on what Jeremy Warner of The Telegraph recently described as a "merry-go-round."

As Warner argues, the long-term "imbalance in trade was largely financed by German banks, which were, in effect, lending the periphery the money to buy German goods. German credit also financed major construction and credit booms in some periphery countries." But when the financial crisis hit, German creditors pulled back from lending and put their surpluses back in the German Bundesbank. Troubled southern economies then turned to the European Central Bank, which—you guessed it—depends on the Bundesbank to keep the credit flowing.

Germany does not bear complete responsibility, of course. As Warner notes, "Periphery governments were equally profligate, if not worse, in spending on the German credit card."

No matter who is to be blame, the disparities built in to the euro zone contributed to making Germany rich. But its willingness to stick with the project may be about more than economic self-interest. Reunited Germany is a relatively young country, shepherded back together by Merkel's mentor, Helmut Kohl. Merkel came of age politically under Kohl's tutelage and is committed to enacting his grand vision: a united Germany in a united Europe. She does this at the same time as she condones the German public blaming their southern neighbors for the present mess.

Merkel cannot pull the emergency switch on the debt "merry-go-round" because the forces that started it and keep it spinning also keep her in power. Thus, it seems unlikely that the present crisis will be resolved until new leadership—unbound by ideological commitments to continental unity—emerges on the scene.