Germany has quietly enshrined in its constitution the requirement that a near-balanced federal government budget be achieved by 2016 and sustained thereafter. As Germany is the most powerful economic and political entity in the eurozone, it will insist that other eurozone members apply fiscal probity as well. This means a fiscal and monetary war.
That war has begun. The new Greek government is in big trouble. It has inherited a massive 12.7% of GDP budget deficit and an 11% of GDP current account deficit. Public sector debt is heading towards 130% of GDP.
The European Commission has given Greece 30 to 40 days to implement a budget plan that will eliminate excesses. If it does not comply, the EC will make it clear that the clauses in the Maastricht Treaty establishing the euro and the European Central Bank forbid sovereign bailouts and that this rule will be strictly applied to Greece. The Germans want to use the Greek economic mouse in a controlled laboratory experiment to demonstrate that fiscal orthodoxy can be successfully imposed within the eurozone – in a clear message to other fiscally profligate member states.
Germany has emerged from the global financial crisis as a bedrock of stability in the eurozone.