Germany and the southern eurozone states are poles apart when it comes to their expectations for a solution to the financial crisis.

 

 

While Germany is the poster boy for the solvent northern states, Greece represents the problem child and all that is wrong in the south. A failure to collect taxes effectively combined with out of control spending has left the southern states on the brink of bankruptcy. What is more they haven’t yet begun to put things right. Instead of undertaking root and branch reform of their tax and spending, they prefer to simply say the right things politically, but without any real change on the ground. They need the northern states to keep ploughing in more funds to keep them afloat. In the face of what appears to be a black hole of need you can understand why the northern states might be reluctant to throw in any more money.  Unfortunately for the north, however, things are not quite so simple. One of the reasons for Germany’s dramatic success is the relatively stable value of the Euro. Whilst the north pushes the value of the Euro up, those in the south push it down and result is equilibrium rather than a currency soaring in value like the Swiss Franc. This is great news for the Germany economy as it means they can continue to sell their goods to the powerhouse emerging market economies of China, India, Brazil and Russia at competitive prices.

 

Europe is therefore in a state of flux; the south needs the north and vice versa but neither is happy with the current arrangements. Expectations from the 9th December EU summit were that in return for a promise of greater fiscal probity by the south, the north would promise more cash or at least agree to underwrite the debts of the whole eurozone. Unfortunately for the southern states this didn’t happen and the only result, cooked up by the Franco/German alliance was an agreement to make balancing the books an ‘enforceable’ requirement of eurozone membership. Whilst this is a laudable objective, it is very much like closing the stable door after the horse has bolted. The critical issues of ballooning sovereign debt and the under-capitalisation of the banks in the eurozone were left unanswered. Presumably this is because Germany and the rest of the north hopes that they can continue as before without further financial commitment. They perhaps feel that, now that there is a new treaty in place, the south just needs to put its house in order, comply with the treaty and all will be well. Time will tell of course, but I would be very surprised if this is the last we hear of the eurozone crisis.