The balance of power in Europe is simple. Germany is the largest nation by GDP. It is also the healthiest economy in the region, driven by intelligent industrial and labor policy and robust exports.

Angela Merkel, Germany’s chancellor, has been distressed by her nation’s role in the bailouts meant to keep small and troubled economies like Greece alive. Many analysts believe that the nearly $1 trillion facility put in place by eurozone nations and the IMF will not be adequate to handle the deficit problems which have begun to emerge in Spain, Portugal, and Italy as well as Greece.

Merkel’s distress about the future of the eurozone is shared by France, the second largest economy in the region.

Merkel has begun to press for changes in the Lisbon treaty, one of the documents which describes how the 27-nation EU is governed. There are two critical aspects to the changes that Germany wants.  First, countries with severe budget problems should restructure their debt before they receive EU funds. This would mean investors in sovereign debt could take huge losses. Second, Merkel also wants nations in the region which cannot balance their budgets to lose their voting rights and consequently their voice in creating  EU policy.

Part of Merkel’s argument is that the German constitution says that the nation must follow very strict rules if it gives financial aid to other nations.

Merkel’s plan may allow German politicians to say they have not violated their own laws, but the results could be cataclysmic. Capital market investors will halt their support of Greece, Spain, Portugal and Italy if they believe that these countries have been given an incentive to default on their national debt obligations. The will cause a sharp increase in the interest rates countries such as Spain will have to pay when they borrow to support national debt. Countries with large budget deficits can hardly bear the burden of higher debt service costs. Merkel’s suggestion would ruin attempts at the austerity meant to improve national financials in economically desperate nations.

Merkel’s suggestion that nations have their voting rights suspended if they cannot meet current debt targets is punitive and does not seem to do much to solve the region’s troubles. Germany and France will set the agenda for the region no matter how the voting process works. They hold most of the money needed for European financial reform. Ostracizing other countries for budget problems that they may not be able to correct due to GDP contraction and labor resistance only makes Germany seem to be a country that wishes to seize the control it already has.

Merkel’s rhetoric may play well with German voters, but it does nothing to solve the region’s financial woes and may actually exacerbate them. The financial world does not want to invest in an area in which the countries are in an economic war among themselves.

Douglas A. McIntyre

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