Commentary: Germany Wins in EU Debt Battle—What Does this Mean?

For months the contest has been between the Germans and most of the rest of the European Union over the debt situation and potential influences on one-another's budgets. The deal is finally in place, and it's notable that Germany’s chancellor held her ground despite the near panic that set in throughout the euro zone.

The Germans were (and are) the only nation that has the resources to pull Europe out of the mire, and they were not going to lift a finger until getting what they wanted. Some concessions were made in the end, but the core structure of the German plan is intact and will be the strategy pursued going forward.

The plan as it stands is based on four key elements and, at the moment, it does not look as if these are all that negotiable.
  • The first is that there will be strict limits on a nation’s budget deficit as well as their spending-to-GDP ratio.
  • The second point is that there will be a system imposed to reduce the existing debts and deficits to no more than 60% of GDP. This is the imposition of some strong austerity plans on those nations that have run up the highest debts.
  • The third part of the plan is the enforcement part—severe and inescapable sanctions if nations fail to adhere to the new rules. Germany wants a club with which to beat the members into financial submission, especially the 'PIIGS Nations.'
  • The fourth element is a common language and strategy as far as budgets are concerned. The consolidation of national budgets will make the task of coordinating policy far easier.
 
Analysis:
There is a very long path between the creation of this plan and its fruition, and there will be many battles ahead. The point is that Germany refused to waver on key points and, now, it becomes a matter of bringing the other nations in the euro zone on board. Germany, which will have to start ponying up the money needed to bail out the southern EU economies, will retain the upper hand on the issue as long as its economy is the only one that has the ability to rescue the others.

Source: Chris Kuehl, NACM economist

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