Germany key to euro resolution

The ongoing euro crisis has focused on the debt-plagued economies at Europe’s periphery, the so-called ‘PIGS’, Portugal, Ireland, Greece and Spain.

How these countries react to their problems will be crucial in steering the euro through this crisis. However, it is the actions of the eurozone’s biggest economy, Germany, that may be most important in determining the single currency’s fate.

This basic fact was underlined by German finance minister Wolfgang Schaeuble when he stated baldly that, ‘Our common currency is at risk.’

German chancellor Angela Merkel described the situation as ‘exceptionally serious.’

Schaeuble also stressed the German government’s determination to play its part in negotiating the crisis, saying ‘If we can't defend our currency effectively as a stable currency, the economic and social consequences for our country and the people in our country would be incalculable.’

However, this determination may not be shared by population in Germany, where there is a strong feeling that taxes should not be used to fund fiscal irresponsibility among the PIGS.

Germany has recently been painted as the engine keeping the eurozone economy afloat, but it too has its own problems.

Strong growth has helped improve the country’s fiscal position, but debt remains huge, according to Schaeuble, who promises to continue tackling the country’s deficit.

Tensions between Germany and the PIGS came to the fore in the run-up to the Irish bail-out, with Ireland underlining its unwillingness to give up the ultra-low corporate tax rates that have helped attract international investment.

The issue is ‘off the table’ according to Ireland's finance minister Brian Lenihan, but many in Germany are loath to bail out Ireland while suffering from its competitive tax rates.

Another difference between Germany and other eurozone countries on one hand and the PIGS on the other may be emerging over draft plans for a crisis resolution mechanism.

The Dutch government has backed a demand by Merkel that private investors should shoulder more risk in indebted euro-area countries. Ireland, Portugal and Greece say this will make it more difficult for them to cut their debts.

Any plan would come into effect from 2013. That may seem a long way off, but the issue is due to be discussed when EU leaders next meet.