Angela Merkel and Wolfgang Schäuble Reynaldo Paganelli/ZumaPress

Germany, Greece, and the Future of Europe

Germany’s demands have brought Greece to the point of near-collapse, with potentially disastrous consequences for Greece, Europe, and Germany’s global reputation. Maintaining a peaceful and prosperous Europe is Germany’s most vital responsibility; but it is surely its most vital national interest as well.

NEW YORK – I have been helping countries to overcome financial crises for 30 years, and have studied the economic crises of the twentieth century as background to my advisory work. In all crises, there is an inherent imbalance of power between creditor and debtor. Successful crisis management therefore depends on the creditor’s wisdom. In this regard, I strongly urge Germany to rethink its approach to Greece.

A financial crisis is caused by a country’s excessive indebtedness, which generally reflects a combination of mismanagement by the debtor country, over-optimism, corruption, and the poor judgment and weak incentives of creditor banks. Greece fits that bill.

Greece was heavily indebted when it joined the eurozone in 2001, with government debt at around 99% of GDP. As a new member, however, Greece was able to borrow easily from 2000 to 2008, and the debt-to-GDP ratio rose to 109%.

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