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Ezrati’s Economic Outlook: Berlin’s Limited Options

Germany has good reasons to preserve the eurozone.

By Milton Ezrati | Updated on July 25, 2012

In Europe’s seemingly endless debt negotiations, Berlin would seem to hold all the cards. It is, after all, Europe’s largest economy, its most powerful and its most financially sound. But in reality, Berlin’s options are highly constrained and require a remarkably delicate policy balance. On the one hand, Berlin, as the eurozone’s pay master, seeks fiscal austerity to ensure that its money and aid go to good purpose, to alleviate future financial strains.

At the same time, it dares not push austerity too hard. Its clear self-interest in preserving the eurozone makes it loathe to risk the departure of any member, much less dissolution. That balance has appeared in past negotiations and almost certainly will in future ones as well. Though the outcome remains uncertain, Berlin’s continuing strong commitment to the zone’s integrity surely increases the probability that in the end, the euro will survive.

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