Germenigma

Germany: What does Germany really want? In the past year, Angela Merkel, the German chancellor, blew hot and cold on the euro zone. She long resisted the very idea of bailing out distressed euro zone countries, before agreeing to rescue Greece and the creation of the EU's lifeboat fund. During the Irish crisis she pressured Dublin into accepting EU aid, and spooked markets by insisting that private creditors accept haircuts on sovereign debt. Within two days in November, she said the euro's problems were "exceptionally serious" and that it would "emerge strengthened" from its predicament.

Germany’s euro zone partners probably hope Merkel will soothe their worries in 2011. Is she still interested in Europe? Or is she tempted to go it alone? Is the long-term strength of the euro close to her heart? Or is her first concern to keep Germany's export machine firing on all cylinders?

Part of the problem is that too few euro zone leaders put themselves in her shoes. What would they do at the head of an aging, industrial country with problems of its own? Yes, an Irish default would have hurt German banks seriously. True, Merkel insists that private creditors must share the pain. But who would have thought six months ago that she would endorse a permanent bailout mechanism for the euro zone? And few of Merkel’s peers seem to understand Germany’s genuine puzzlement at being asked to sacrifice the rewards of past economic discipline.

That said, Germany’s vulnerabilities, not its strength, provide a better opening for its partners. The country’s banking sector is in a shambles, with precarious regional lenders. The government has budgeted 480 billion euros to provide the banking sector with guarantees and recapitalisations: that’s more than the euro zone has committed to the European Financial Stability Facility for helping all its indebted members. Germany has more than one reason to keep the euro zone together — beyond the basic fact that it remains its main export market.

The challenge for Germany’s partners is to be more fiscally responsible, as the right response to the crisis and to propagate long term growth. The challenge for Berlin is to accept that not everyone in the euro zone can — or should — be like Germany.