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Satyajit Das on the Eurozone Debt Crisis: It's Now About Germany

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In the end, German citizens will have to pay twice for the euro, if not more.

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Doubling the Losses

In 1999, Finance Minister Theo Waigel proclaimed that the euro would be like the German Deutschemark it was replacing. In his book Fat Years: Why Germany Has a Brilliant Future (co-authored with journalist Dirk Heilmann), Waigel predicted that Germany would become the world's richest country as measured by income per head by 2030.

Now, the entire project faces an unimagined crisis. As Lorenzo Bini Smaghi, a former Italian ECB executive board member, observed: "The assumption was … that there would be no crises."

As anti-austerity parties gain support in the rest of Europe, German willingness to finance further bailouts is diminishing. Increasingly, Germans fear an unending commitment to preserve the common currency and the eurozone. The resentment is evident in a headline in the popular tabloid Bild: "Sell your islands, you bankrupt Greeks. And the Acropolis while you're at it." But it may be too late.

Germany's attempt to balance the benefits of the single currency and the advantages of preserving the eurozone against its traditional preference for fiscal and monetary conservatism has failed, leaving the nation with severe financial problems which will curtail future growth. The size of the exposure is large, both in relation to Germany's GDP of around Euro 2.5 trillion and German household assets which are estimated at Euro 4.7 trillion.

German citizens will have to pay twice for the euro.

In the early 2000s, they paid through internal devaluation – reductions in real wages, unemployment and labor market reforms. Now, they will have to pay for the bailouts. Once the artificial boom ends, voters will discover they were betrayed by Germany's pro-European political elite. There will be an electoral revolt and, as in the rest of Europe, a strong challenge from radical political forces with unpredictable consequences.

Germany's history is one of monumental reverses and extremes. In his 1901 novel Buddenbrooks, about a well-to-do North Germany family whose fortunes are in decline, Thomas Mann anticipated the present situation: "I know that the outwards, visible and tangible signs and symbols of happiness and achievement often only appear when in reality everything is already starting to go downhill again.The outer signs take time to arrive – like the light of a star which shines most brightly when it is on the way to being extinguished, or maybe has already gone out."

As Friedrich Nietzsche knew: "…hope is the worst of all evils, because it prolongs man's torments." Germany may not, as widely assumed, offer a safe haven in the European debt crisis.

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