STRATFOR has an excellent article up detailing Germany’s geostrategic position and how it came about that a bailout of Club Med hinges on German largesse.
This is a phenomenal look at how the Euro Zone came to its current impasse and what Germany’s options are to restore fiscal sanity to its neighbors. Ironically, STRATFOR makes the case that Germany needs to get back to being more German – discipline is exactly what the rest of Europe needs from its economic leader.
The first option, letting the chips fall where they may, must be tempting to Berlin. After being treated as Europe’s slush fund for 60 years, the Germans must be itching simply to let Greece and others fail. Should the markets truly believe that Germany is not going to ride to the rescue, the spread on Greek debt would expand massively. Remember that despite all the problems in recent weeks, Greek debt currently trades at a spread that is only one-eighth the gap of what it was pre-Maastricht — meaning there is a lot of room for things to get worse. With Greece now facing a budget deficit of at least 9.1 percent in 2010 — and given Greek proclivity to fudge statistics the real figure is probably much worse — any sharp increase in debt servicing costs could push Athens over the brink.
From the perspective of German finances, letting Greece fail would be the financially prudent thing to do. The shock of a Greek default undoubtedly would motivate other European states to get their acts together, budget for steeper borrowing costs and ultimately take their futures into their own hands. But Greece would not be the only default. The rest of Club Med is not all that far behind Greece, and budget deficits have exploded across the European Union. Macroeconomic indicators for France and especially Belgium are in only marginally better shape than those of Spain and Italy.
We’ll see if prudence and tough love win out in Europe. They haven’t yet, but you never know.