Everyone is worried that Greece will default on its national debt. That's really not news. By one estimate, since it gained its independence from the Ottomans in 1832, Greece has been in default or restructuring for half this period. The news is that this time, Germany is willing to bail it out.
Throughout the euro-zone crisis, it has become conventional wisdom to regard the Germans as narrow-minded, ungenerous and dogmatically wedded to prescriptions of austerity to treat Europe's problems. Those criticisms are vastly overstated. Consider that Germany is being asked to take its taxpayers' money--in a democracy--and use it to bail out a country like Greece, which is guilty of mismanagement, poor competitiveness and financial fraud. And it has said yes! In return for this, Germans are being called Nazis in Greek newspapers.
Germany was an organizer of and is by far the largest contributor to the European Financial Stability Facility, which totals a staggering 726 billion euros ($924 billion). That number will rise and, when combined with earlier funds and loans, Germany's share will easily exceed the country's total annual federal tax revenues. Imagine the U.S. being willing to guarantee more than $2 trillion to bail out Mexico.
We hear a lot about the German public's opposition to helping the Southern European countries. What's remarkable, given the scale of German aid, is how little opposition there is. This month, Parliament will easily ratify a number of these funding mechanisms as well as a new financial-transaction tax to pay for part of this. (The Germans have the old-fashioned, conservative view that if you spend money, you should pay your bills.) In late February, one of the bailout packages cleared the German Parliament in a 496-to-90 vote. The German government has also relaxed its once rigid opposition to a more aggressive monetary policy. Mario Draghi, head of the European Central Bank, would not have been able to provide cheap loans to Europe's banks--thus staving off a Lehman Brothers--like crisis--without German approval.
There is a lively political debate to be had about whether the U.S. needs austerity measures right now. (I would say no.) But Greece and the other weak euro-zone countries had few options. Markets had become unwilling to lend them money because of their ever rising debt loads. It was as a response to genuine market pressures that these governments began to get their budgets in order. The austerity programs place too little emphasis on growth, but had these nations wantonly spent money, their interest payments would have skyrocketed. Most important, the Germans have not emphasized austerity so much as structural reform--opening up labor markets, liberalizing sectors and dismantling protections. What economies like Greece really need is less austerity and more reform. The lesson of most debt crises is that countries that make these changes ultimately make themselves more competitive.