00:17, 6/27/12

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The quiet before the storm.

Found at the guardian:

François Hollande and Angela Merkel meet in Paris with high stakes at play

Franco-German discussions need to build 'a concrete path' for Europe, says José Manuel Barroso

• 
• • Ian Traynor, Europe editor
  • guardian.co.uk, Tuesday 26 June 2012 14.08 EDT

"Chancellor Angela Merkel goes to Paris on Wednesday to try to strike a Franco-German deal with President François Hollande amid deep-seated differences at what has been described as Europe's defining moment.
With the two key EU countries split for the first time in 30 months of single currency and sovereign debt crisis, José Manuel Barroso, head of the European Commission laid bare the high stakes in play at an EU summit in Brussels on Thursday as well as the high frictions between Germany and France.
Merkel's first visit to the Élysée Palace under its new occupant has been hastily arranged and comes on the eve of what is being billed as a crucial Brussels summit which, apart from the immediate financial dilemmas, is to wrestle with a radical blueprint aimed at turning the 17 countries of the eurozone into a fully-fledged political federation within a decade.
"We must articulate the vision of where Europe must go, and a concrete path for how to get there," warned Barroso. But he was unsure "whether the urgency of this is fully understood in all the capitals of the EU".
Since his election last month, France's socialist leader has quickly emerged as the most formidable challenger to German formulas for Europe's salvation after two years of Berlin largely dictating the EU response to the crisis.
Merkel is feeling bruised, having just withstood two unusual attempts by fellow leaders to ambush her and get Berlin to hand over its credit cards to write off what they see as other countries' profligacy.
In Mexico last week at the G20 and then in Rome at two bad-tempered summits in recent days, the Americans and the British – in cahoots with the leaders of France, Spain and Italy – sought to press Merkel into bankrolling fiscal stimulus and bank recapitalisation policies that would cut the vulnerable eurozone countries' cost of borrowing.
"It was all wishful thinking or a political game," said a senior EU official of the ambush attempts. "There are substantial economic and political interests at play. Governments are spinning in their respective interests."
The pressure on Merkel may have backfired and reinforced German resistance to the ideas. The view in Berlin is that Hollande will have to back down amid the relative weakness of the French economy.
The blueprint unveiled on Tuesday calls for a eurozone political federation to be built over a decade entailing four stages. The details are thin and are to be fleshed out by the end of the year by the heads of four of the main European institutions, but the proposals – a response to the Greek drama that erupted 30 months ago and which has engulfed the EU into its most perilous crisis ever – mark the most ambitious European plan since agreement on the single currency was reached at Maastricht 20 years ago.
Thursday marks the start of what will be a long, exhausting, and bruising battle essentially pitting German-led integrationist pressure against French-led protection of sovereign authority and reluctance to cede immense powers over budgets and tax-and-spend policies to Brussels and a new eurozone finance ministry, proposals that also raise fundamental questions about democratic legitimacy in the EU.
To be realised, the "political union" would require a major legal overhaul, reopening EU treaties, endless quarrels, probably a new German constitution and perhaps a referendum in Britain and its departure from the EU.
"These decisions on deeper economic, financial and fiscal integration imply major changes to the way our citizens are governed and to the way their taxes are spent," said Barroso. "This crisis is the biggest threat to all that we have achieved through European construction over the last 60 years… A big leap forward is now needed."
The proposals, likely to expose fundamental splits over Europe's future, will do little to resolve the immediate debt and currency crisis. The hope is that the medium-term master plan will placate the financial markets by demonstrating political resolve to defend the currency at all costs. The risk is that the leaders will appear so divided that the markets might step up their probing of the weaker bits of the eurozone, notably Spain and Italy.
Without a Franco-German accord, the prospects of a damaging summit in Brussels are high. Last week Hollande issued policy proposals for the summit, a growth and jobs pact whose details are anathema to Berlin – the issue of short-term shared eurozone debt leading to full pooled debt, common eurozone guarantees for bank deposits, protectionist measures favouring European manufacturers and bidders for public contracts over outsiders as well as direct eurozone recapitalisation of dodgy banks without increasing national debt levels.
The Germans feel under pressure, but Merkel will court big trouble at home if she yields. A pro-European commentator in Der Spiegel this week suggested she should sacrifice her political career to save Europe and the currency.
There is little chance of that happening. But the German elite is deeply worried about Hollande's France, because of the impact it could have on the German economy's prospects battling the emerging might of China, India or Brazil.
Berlin's angst is that Europe can only be saved and a successful Europe re-established if the two core countries are in harness, that it cannot bear the burden alone, and that if the Franco-German dynamic dissipates, the German economy will be among the biggest victims of failure.
Berlin points to the widening gap in employment costs between Germany and France; a youth unemployment rate in France triple that of Germany; Hollande's first move in reducing the retirement age and France's overall loss of competitiveness over the past decade. It fears being dragged down as a result. The cautious hope is that Hollande will turn out or be forced to be France's Gerhard Schröder, the ex-German chancellor and, like Hollande, a social democrat who executed the economic, welfare, and structural reforms a decade ago that put Germany in its current strong shape.
Hollande heads a socialist party, however, that is a lot less "modernised" than Schröder's SPD or the Labour Party under Blair and which is eternally split over Europe. Hollande's foreign minister, Laurent Fabius, spearheaded the No campaign in the French referendum that sunk the European constitution in 2005.
And the crisis is throwing into sharp relief the basic divisions, particularly on the grand plan being fought over . A crisis that started financially on the EU's periphery, in Greece, Ireland, and Portugal, has now shifted politically to the union's heart, the Berlin-Paris axis.
France may baulk at the blueprint being tabled, being deeply reluctant to surrender so much sovereign power to new eurozone authorities, while Germany will only accept the liability for others being thrust on it if the powers are federalised.
A senior EU diplomat intimately involved in the Franco-German dynamic for 20 years says, however, that Merkel and Hollande are condemned to forging a modus operandi and that the stakes are too big.
"Helmut Kohl and François Mitterrand were dreadful at the start. They hated each other. Gerhard Schröder and Jacques Chirac was the lowest I ever saw. It's always like this with France and Germany," he said.
"They always represent different positions and then they find a compromise that everyone else agrees with except the UK.""


http://www.guardian.co.uk/commentisfree/2012/jun/26/cyprus-request-bailout-raises-fear-contagion

"

Cypriot president Demetris Christofias (R) shakes hands with Stefan Fule, the EU commissioner on enlargement and European neighbourhood policy in Nicosia, Cyprus. Photograph: Katia Christodoulou/EPA

The timing could not be worse. Just days before Cyprus is due to take up the European Union's presidency and the task of guiding Europe out of its financial crises, it has become the fifth eurozone member to request a Brussels bailout.
It does not bode well that a bailout country is now mandated with securing agreement on the financial framework of Europe's budget for the next seven years. The Germans have already started to make noises about Cyprus holding the presidency while trying to negotiate a loan. But the government has chosen to draw attention to itself, and the plight of its economy, by waiting until the last moment to ask for a little help from its friends.
There was time to apply for a bailout in an orderly fashion, but Cyprus waited until it was pushed into a corner – after negotiations for a loan from Russia or China failed – and the world's media is, unsurprisingly, zoning in on the sticky situation – hardly the best way to encourage investor confidence, or show that Cyprus is a capable player on the European stage.
Cyprus is the eurozone's third smallest economy, but has managed to make the whole of Europe twitch over the possibility of the contagion spreading across the single currency bloc.
The Mediterranean island was undone by a banking sector heavily exposed to debt-paralysed Greece and a write-down of Greek bonds, which hit Cypriot banks hard, pushing Nicosia to seek help just as it picks up the six-month rotating presidency.
For weeks, if not months, the government – led by communist leader President Demetris Christofias – gave the impression it was doing everything possible to avoid going cap in hand to the EU. But finally, with time running out to recapitalise the island's second largest bank, Cyprus Popular, the cash-strapped government ran out of quick-fix options.
A vocal opposition has already criticised Christofias for dawdling over fresh austerity measures while the economic landscape worsened. In a highly unusual move, former central bank governor Athanasios Orphanides accused the president of trying to destroy the banking system in an open letter, saying he was discrediting the banking system by blaming the island's economic woes solely on exposure to Greek debt. Orphanides – who was replaced by Christofias when his five-year term ended in April – argued that fiscal slippage and delays reforming an unwieldy public sector were part of the problem. The president was also chastised for supporting a severe 75% write-down on Greek debt with his European colleagues.
Cyprus still hasn't ruled out borrowing from a third country to soften the blow of the bailout conditions.
In 2011 the island avoided having to apply for EU aid by securing a €2.5bn Russian loan to cover debt refinancing for that year. But Cyprus's ailing €17.3bn economy is now expected to need an injection of €10bn. The recession-hit economy is struggling with record unemployment of more than 10%, austerity measures, and trying to rein in a deficit which is twice the EU's limit of 3% of GDP. Finance minister Vassos Shiarly has suggested that the bailout cash required is not just to prop up a relatively large banking system but to cover the state's fiscal requirements.
Government spokesman Stefanos Stefanou has tried to allay fears that the terms of the bailout would be harsh for Cypriots, saying the island's cherished 10% corporate tax rate remains safe from European tinkering. Moreover, the Cyprus Central Bank backs the government's move to request a bailout as it would protect its Greek-exposed banking sector from further contagion.
The bailout request was triggered when Fitch Ratings downgraded Cyprus's sovereign ratings, saying this was "principally due to Greek corporate and household exposures of the largest three banks – Bank of Cyprus, Cyprus Popular Bank and Hellenic Bank".
But Cyprus has been unable to borrow from international markets since 2011, after being reduced to junk status by two of the three international credit agencies.
Although the government is committed to reducing its bloated deficit from 6.4% to below 3%, it is reluctant to introduce deeper public cuts to drastically slash the deficit.
Which leaves an island that prided itself on prosperity bracing itself to take its medicine as one of Europe's ailing nations."

The Euro is a disaster and should end. 

It looks to be toast.

Der Speigel:

Endangered Currency

First Greece -- then Ireland, Italy, Spain and Portugal: The European common currency has come under pressure from large national debts and the effects of the global financial crisis, ultimately requiring a rescue package close to a trillion euros.

George Soros on the Euro Crisis 'A Tragic, Historical Mistake by the Germans'

SPIEGEL ONLINE - June 26, 2012 With the EU summit set to start on Thursday, pressure is on European leaders to find a way out of the euro crisis. Investor George Soros is pessimistic that a solution will be found and says time is extremely short. In an interview with SPIEGEL ONLINE, he warns that Germany could develop into a hated, imperial power. more...

"

SPIEGEL ONLINE: In Germany, once the motor of European integration, people are openly discussing the possibility of leaving the euro zone. Many Germans believe that a return to the deutschmark would be cheaper than to remain stuck in a flawed currency union. Are they right?

Soros: There is no question that a breakup of the euro would be very damaging, very costly, both financially and politically. And the biggest loss would be incurred by Germany. Germans have to bear in mind that, effectively, they have suffered practically no losses so far. Transfers have all been in the form of loans, and it is only when the loans are not repaid that real losses will be incurred. SPIEGEL ONLINE: In surveys, though, most Germans no longer believe that loans granted to Greece or other nations will ever be repaid. They worry that Germany is simply on the hook for the rest of Europe.
Soros: But that would be the case only if the euro broke up. We have witnessed a tremendous capital flight, not only from Greece but also from Italy and Spain. All those transfers would result in claims by the banks of the creditor countries against the central banks of the debtor countries in the Euroclear System, the TARGET 2. I believe that claims by the Bundesbank will exceed a trillion euros by the end of this year.
SPIEGEL ONLINE: Should the euro zone collapse, these claims could become virtually worthless. Is Chancellor Angela Merkel just bluffing when she flirts with the idea of a German euro-zone exit?
Soros: Germany could leave, but it would be incredibly costly. I just read the report of the German Finance Ministry, which estimates the costs of a euro-zone exit in terms of employment and economic activity, both of which are real. Because this is the case, Germany will always do the minimum to preserve the euro. Doing the minimum, though, will perpetuate the situation where the debtor countries in Europe have to pay tremendous premiums to refinance their debt. The result will be a Europe in which Germany is seen as an imperial power that will not be loved and admired by the rest of Europe -- but hated and resisted, because it will perceived as an oppressive power.
SPIEGEL ONLINE: Why should Germany carry all the blame? After all, other EU nations shied away from necessary structural reforms and lived beyond their means.
Soros: There is no doubt that the countries that now have a very large debt have not introduced the kind of structural reforms that Germany did and are therefore at a disadvantage. But the problem is that this disadvantage is becoming even more pronounced through the punitive policies in place now. Italy currently has to spend 6 percent of its GDP every year just to stay even with Germany because it has to pay so much more to refinance its debt. There is no way, with that handicap, that Italy can close the competitiveness gap with Germany.
SPIEGEL ONLINE: Once again: How is that Germany's fault?
Soros: This is the joint responsibility of everyone who was involved in the introduction of the euro without understanding the consequences. When the euro was introduced, the regulators allowed banks to buy unlimited amounts of government bonds without setting aside any equity capital. And the European Central Bank discounted all government bonds on equal terms. So commercial banks found it advantageous to accumulate the bonds of the weaker countries to earn a few extra basis points.
SPIEGEL ONLINE: And that then dragged down interest rates?
Soros: Yes. The lower interest rates fueled housing and consumption booms in countries such as Spain and Ireland. At the same time, Germany, struggling with the burdens of reunification, tightened its belt and became more competitive. All this led to a wide divergence in economic performance. Europe became divided into creditor and debtor countries. All these conditions were created by European authorities, including the European Central Bank, which was largely modeled after the Bundesbank. Germans tend to forget now that the euro was largely a Franco-German creation. No country has benefited more from the euro than Germany, both politically and economically. Therefore what has happened as a result of the introduction of the euro is largely Germany's Schuld -- its responsibility.
SPIEGEL ONLINE: Germans remember the birth of the euro very differently. They felt they had to give up the deutschmark in order to get other European Union nations to agree to German reunification.
Soros: True. The integration of Europe was very much led by a Germany that was always willing to pay a little bit extra to reach a compromise that everybody accepted, because Germany was so eager to get European support for reunification. That was called the "farsighted vision," which created the European Union.
SPIEGEL ONLINE: Do we need a similar vision today?
Soros: I want to draw the parallel between what is happening with the euro zone right now, and what happened after World War II, when the Bretton Woods system of monetary management was created to govern the global economy. Then, America became the center of this system, and the dollar became the dominant global currency. It was a free world dominated by America. But America earned that position by providing huge funds for the reconstruction of Europe through the Marshall Plan. America became a benevolent imperial power, which greatly benefited America.
SPIEGEL ONLINE: How can that situation be compared to the one in which we find ourselves today?
Soros: Germany is in a similar position today, but it is not willing to engage in anything like the Marshall Plan. It is opposed to any transfer union for the rest of Europe.
SPIEGEL ONLINE: The Marshall Plan, though significant, amounted to just a small share of the US gross domestic product. The potential payouts related to a euro rescue program, on the other hand, might be more than Germany can handle.
Soros: Nonsense. The more comprehensive and convincing a debt reduction program is, the less likely it is to fail. And remember, just as Germany is grateful to America for the Marshall Plan, Italy would be grateful to Germany for helping it lower its refinancing costs. If it did that, Germany could set the conditions. And Italy would be happy to meet those conditions, because it would benefit from it. Not to recognize this opportunity is a tragic, historical mistake by the Germans.
SPIEGEL ONLINE: Why did Americans support the Marshall Plan then while Germans now back Merkel's tough push for austerity?
Soros: America felt victorious and generous after World War II. They had also learned from the mistakes after World War I when they imposed punishment on Germany. What became of Germany? A Nazi dictatorship which threatened the world. Today's Germany doesn't feel as prosperous and generous as America then. But actually, Germany still is very prosperous.
SPIEGEL ONLINE: It is precisely that prosperity that Germans are fearful of losing.
Soros: The German position is simply short-sighted. Currently, there is no sign of a crisis in Germany. But if the euro crisis is not resolved quickly, Germany will very soon begin to feel the global decline in economic activity.
SPIEGEL ONLINE: You said a few weeks ago that there were only three months left to overhaul the structure of the currency union.
Soros: Well, we are down to three days now.
SPIEGEL ONLINE: Three days?
Soros: Europe's leaders need to take bold steps at the EU summit on Thursday and Friday.
SPIEGEL ONLINE: Do you think Angela Merkel is prepared to take such steps?
Soros: She is trapped. Merkel has realized that the euro is not working, but she cannot change the narrative she has created because that narrative has caught the imagination of the German public, and the German public has accepted it.
SPIEGEL ONLINE: The narrative essentially says that crisis-stricken nations simply haven't made the necessary reforms, unlike Germany.
Soros: Right. But at the same time, Chancellor Merkel realizes that what is happening is not working, and so she is determined to preserve the euro.
SPIEGEL ONLINE: German Finance Minister Wolfgang Schäuble gave an interview to SPIEGEL saying that now is the time for bold steps. He outlined ideas for a closer political union in Europe.
Soros: Schäuble is representative of the Germany of Helmut Kohl. He is the last European standing, and he is a tragic figure, because he understands what needs to be done, but he also realizes the obstacles that stand in the way, and he cannot find a way to overcome these obstacles. So he is really suffering.
SPIEGEL ONLINE: What would be your advice to Minister Schäuble?
Soros: The key problem is the debt restructuring in the euro zone. As long as the debt burden is not reduced, there is no chance of the weaker EU countries regaining competitiveness.
SPIEGEL ONLINE: How could that be achieved?
Soros: I propose a European Fiscal Authority which, in partnership with the European Central Bank (ECB), can do what the ECB cannot do on its own. It could establish a Debt Reduction Fund, similar to that proposed by Chancellor Merkel's Council of Economic Advisors and endorsed by the Social Democrats and the Greens. In return for Italy and Spain undertaking specified structural reforms, the Fund would acquire and hold a significant portion of their outstanding stock of debt.
SPIEGEL ONLINE: And where should the money come from to buy up these sovereign bonds?
Soros: The Fund would finance the purchases by issuing European Treasury Bills (eds. Note: a variation on Euro Bonds but with a shorter maturity period) -- a joint obligation of the member countries -- and pass on the benefit of cheap financing to the countries concerned. Such a step would create a more level playing field, because Italy would be able to finance half its debt at 1 percent and the other half would also come down. It would provide real relief to Italy and Spain.
SPIEGEL ONLINE: And once crisis-stricken countries feel that relief, they would cease implementing tougher reforms.
Soros: Quite to the contrary: Reforms would become much easier. It is all about incentives. In the case of Italy, the administration of Prime Minister Mario Monti would like to have much stronger labor market reforms than it is able to push through. If there was a reward of being able to refinance your debt at 1 percent, Monti could push such reforms through.
SPIEGEL ONLINE: But what would happen, for example, should there be a change in government, with the new leaders unwilling to pursue such reforms?
Soros: Then you simply withdraw the concession and suddenly, instead of being able to borrow at 1 percent, the government has to go to the market. And the market is going to punish you. No government could do that without having to pay a heavy price for it.
SPIEGEL ONLINE: But that would push Italy into bankruptcy, a nuclear option that European authorities would never dare to detonate.
Soros: You could adjust the punishment to fit the infraction. Even a small fine would be enough to bring an errant government to heel.
SPIEGEL ONLINE: Could such a plan help Greece remain in the euro zone as well?
Soros: Unlikely. Rescuing Greece would require an enormous kind of magnanimity and generosity. The situation there has simply become too poisoned. I think that by standing firm and not compromising on Greece, Angela Merkel would be in a better position to persuade the German public to be more generous toward other nations and distinguish between the good guys and bad guys in Europe.
SPIEGEL ONLINE: Would you agree with Merkel's statement that Europe will fail if the euro fails?

Soros: Yes. Because in the long run, you cannot have a common market without a common currency. SPIEGEL ONLINE: If you were still an active investor, would you be tempted to make massive bets against the euro?
Soros: As an investor, I would be very pessimistic, especially about Europe. But as a believer in an open society, I have to put my faith in the people and leaders of Europe to show some reason.

Interview conducted in London by Mathias Müller von Blumencron, Stefan Kaiser and Gregor Peter Schmitz"

This is Soros' position.  It will not happen in three days or three months.

It will not happen.

 

Halting Europe's Downward Spiral A Master Plan to Save the Euro

SPIEGEL ONLINE - June 26, 2012 Economics experts from across Europe released a report on Tuesday offering a roadmap to a stable euro. The plan seeks to reconcile German calls for greater fiscal responsibility with the desire of beleaguered Southern European countries to introduce euro bonds. more... [ Forum ]

High Stakes ahead of Crunch Summit Euro Crisis Threatens European Way of Life

SPIEGEL ONLINE - June 26, 2012 European leaders have been muddling through instead of properly tackling the debt crisis. Now it threatens the very foundations of the European Union and could destroy a lifestyle that millions of Europeans take for granted. But the high expectations for this week's summit in Brussels can only be disappointed. By Konstantin von Hammerstein, Ralf Neukirch and Christoph Schult more... [ Forum ]

The World from Berlin Germany Debates a Euro Bailout Referendum

SPIEGEL ONLINE - June 26, 2012 German Finance Minister Wolfgang Schäuble kicked a political hornets' nest when he suggested to SPIEGEL that a referendum on efforts to save the euro will have to be held sooner or later. German commentators jumped into the debate on Tuesday. more...

Not even "Peace in our time".


BBC:

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The financial Times has a less happy view.


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Sources: FT, Bloomberg, Markit

http://www.nytimes.com/2012/06/27/business/economy/why-germany-will-pay-up-to-save-the-euro.html?_r=1&hp

To go by the pronouncements coming out of Germany over the last couple of weeks, you might naturally conclude that the euro is toast. Speaking before Parliament, Chancellor Angela Merkel broadly rejected “counterproductive” proposals to pool Europe’s resources to help floundering Mediterranean nations. Germany’s “strength is not infinite,” she stressed. German voters are even more skeptical than their leaders about financing their “slothful” and “profligate” neighbors. Though most still tell pollsters they want to keep the single currency, almost four-fifths want Greece to leave — oblivious to the chain reaction that Greek departure would unleash against Portugal, Spain and even Italy.

Yet it would be wrong to kiss the euro goodbye just yet. For all of Berlin’s neins, shooting down every serious proposal to address its woes, the German government knows it must ultimately cave and open its wallet to save the single currency.

Berlin’s wall of hostility against bailouts of Europe’s south will be on display this week, when European leaders will again try to cobble together a plan to address their debt crisis. They will discuss Greece’s request to ease the terms of its $217 billion rescue package, as well as proposals to create a regional banking union and Spain’s request for $125 billion to shore up its failing banks.

Berlin will drag its feet as long as it can before offering help, as has been its wont throughout the crisis. It will demand assorted quid pro quos. Last week, the German finance minister, Wolfgang Schäuble, warned Greece not to expect much sympathy and demanded that Athens comply with the austerity measures “quickly and without delay.”

But Ms. Merkel knows that Germany must ultimately underwrite the euro’s rescue, pretty much regardless of whether its conditions are satisfied. There are three good reasons. First, the euro has been very good to Germany. Second, the bailout costs are likely to be much lower than most Germans believe. Third, and perhaps most important, the cost to Germany of euro dismemberment would be incalculably high — far more than that of keeping the currency together.

Let’s take the reasons in turn. Germany has had a fairly good crisis so far. Since 2009, when it fell into a deep recession, it has grown faster and suffered less unemployment than almost any other industrialized country. Wages are rising. And exports have rebounded sharply from the crisis to surpass their peak of 2008.

Germany owes much of this to the euro — which tethered its ultracompetitive manufacturing to the mediocre economies of its neighbors. Since the advent of the single currency, Germany’s labor costs have fallen more than 15 percent against the average labor costs of all the countries using the euro, and about 25 percent against those of the troubled nations on the periphery. If it dumped the euro for a new deutsche mark, its exchange rate would surge to make up for the difference, potentially crippling its exports, which have fed most of its economic growth over the last decade.

What about the cost of a bailout? German economists are pushing the story that Germany has already squandered enormous sums on the euro’s survival, going above and beyond the call of duty. Hans-Werner Sinn, who heads the Ifo Institute for Economic Research in Munich, argued in a commentary piece on the Op-Ed page of The New York Times that Germany had given Greece so far the equivalent of 29 times the aid given to West Germany under the Marshall Plan after World War II. His analysis omitted, however, that aid was just a small part of the Marshall Plan’s help to Germany. Most important, the plan also wiped out a majority of Germany’s debt.

While Germany has committed a few hundred billion euros to rescue the currency, if the rescue succeeds, it should recover all of it. And it can readily do more. William R. Cline, an economist at the Peterson Institute for International Economics, told me that covering the entire financing needs of Greece, Ireland, Portugal, Spain and Italy through 2015 would cost about $1.6 trillion.

If the International Monetary Fund contributed one-third, Germany and other rich euro area countries would be left to put up the rest. But even if Germany’s share reached $500 billion, it would not forfeit this money. After all, the goal of the bailout would be to prevent defaults. Germany could even turn a profit.

Most economists and policy makers outside Germany agree that keeping Europe’s common currency together over the long term will require a permanent mechanism to pool risk — transferring resources from the euro area’s powerful core to its weaker members. Germany, predictably, has balked at this prospect as way too expensive. Yet German estimates seem exaggerated.

One way to pool risk would be to allow countries to issue “euro bonds,” which would be jointly guaranteed by all the countries in the euro area and thus carry a much lower interest rate than markets are charging countries like Italy and Spain.

Kai Carstensen of the Ifo Institute estimated that euro bonds would end up raising Germany’s annual borrowing costs by 1.9 percent of the country’s gross domestic product — more than $60 billion — because it would pay a higher rate of interest than German bonds do now.

But an analysis by Mr. Cline of the interest rates paid by countries of different credit ratings since the late 1990s suggests a much lower price tag: the borrowing costs of triple-A countries like Germany and France would rise by 0.35 percent of G.D.P. per year. And the benefits would clearly outweigh the costs. Portugal, for instance, would save 1.9 percent of its G.D.P. in lower interest costs, giving it much-needed breathing room.

Rather than spending so much effort discussing the cost of bailing out Europe, Germany might do better by opening a public debate about the costs of letting the euro start to fall apart. Those are likely to be much less manageable. If the package for Spanish banks was agreed to, Germany would be left directly responsible for more than $100 billion committed since 2010 to the rescues of Greece, Ireland, Portugal and Spain. The Bundesbank is owed nearly $900 billion by other central banks in the euro area. And its banks still have hundreds of billions in loans to banks in peripheral countries. It’s hard to say what would happen to this debt if the euro were to break apart and weak countries to default. But chances are much of it wouldn’t be honored.

And that’s just the direct financial hit. The German government has reportedly estimated that the German economy would shrink 10 percent if the euro were to break up, twice as much as it did in 2009, during the global financial crisis.

Then, there are the more difficult to measure strategic costs. Already, commentators in Europe are urging France, Spain and Italy to isolate Berlin, offering Germany the kind of ultimatum Germany likes to issue to its poorer neighbors: accept a common European bailout or leave the euro zone.

In light of costs and benefits, it is perplexing why Germany is so adamant in saying no. It hasn’t just blocked pooling bonds. It opposes allowing the European Central Bank to become a lender of last resort for troubled banks. Calls to let German wages rise as fast as German productivity, to allow peripheral countries to close the gap with German labor costs, are derided in Berlin as absurd attempts to curb German competitiveness.

The Harvard economist Jeffrey Frankel, who was on President Bill Clinton’s Council of Economic Advisers when the euro came into being more than a decade ago, pointed out that skeptical German voters agreed to trade in the deutsche mark only after their political leaders assured them they would never have to bail anybody out. “It turns out German taxpayers were right and their political leaders were wrong,” Mr. Frankel said.

Chancellor Merkel’s foot-dragging, the impossibly harsh conditions attached to ineffective bailout packages and the German demands to centralize control in Brussels over weak countries’ budgets can be understood as an attempt to persuade German voters that monetary union could be rewritten on German terms. “Merkel will try to extract quid pro quos,” noted Barry Eichengreen, an economist at the University of California, Berkeley. “She will do this by delaying, by asking for prior actions, hoping the other side moves first.”

But given the stakes, it is hard not to conclude that Germany will ultimately pay whatever it takes. It’s not that difficult a call. On one hand, there are manageable costs and clear benefits. On the other, there is a decent chance of unmitigated disaster."

I doubt it.

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