Martin Wolf has an interesting piece in today's Financial Times. The newspaper also has a series on the euro crisis, including a diagram showing how Greece could exit the euro zone and what the consequences would be. I believe a subscription is necessary to see the full column though so I will briefly summarize Wolf's column, "The Riddle of German Self-Interest."
Wolf says the crisis is clear, and he focuses on Spain and Italy because of their size. They are unable to manage their debts without some assistance. Much of the government's debt is held by the banks in the countries.Some of the debt has been generated to help the financially weak banks. Wolf uses a common metaphor to describe this--two drunks trying to hold each other up. Wolf argues that the austerity required by the EU is ineffective because the private sector has already gone to austerity and declining government spending keeps GDP going down. As he puts it, "The reward for pain today is pain tomorrow."
He then looks at how Germany wants the euro zone organized. He believes it is no to eurobonds, no to increase in funds for the European Stability Mechanism, no to monetary expansion, and yes to austerity. So how do the German authorities think the slide in the periphery nations will be halted? Wolf offers two hypotheses. First, Germany believes the weaker nations will eventually pull out of the euro leaving a smaller but more stable euro. Second, they think their policies will work and things will turn around. Wolf doesn't think it will work. In fact, he thinks Germany is shooting itself in the foot since Germany relies on exports to other EU countries so heavily.
Wolf's final paragraph is:
"In October 1939, Winston Churchill said: “I cannot forecast to you the action of Russia. It is a riddle, wrapped in a mystery, inside an enigma; but perhaps there is a key. That key is Russian national interest.” The key in Europe today is Germany’s perception of its national interest. Once it becomes evident that their conditions will not work, German leaders will have to choose between a shipwreck and a change in course. I do not know which Germany will choose. I do not know whether its leaders know. But on that choice hangs the fate of Europe."