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The more infighting there is, the worse Europe's debt crisis becomes. Greece is spiraling toward a default. While some economists say that's inevitable and that Europe should take the pain and move on in order to heal itself, others fear the worst-case scenario could be a Lehman-like meltdown, paralyzing financial markets and possibly tipping the globe back into recession. That would make it extremely difficult for the U.S. to restart its recovery or reduce joblessness--Europe and the U.S. are key trading partners. "Europe is on a crab walk to disaster," warns economist Ken Courtis, "and should that happen, there would be very few places to hide, for anyone." No wonder U.S. Treasury Secretary Timothy Geithner was invited to a mid-September European finance ministers' meeting, where he urged leaders to quit arguing and take tougher action in the face of the debt crisis. (One response: Fix your own problems before criticizing us.)
All of this raises the question, Why won't Germany lead? The answer is rooted in history. German leaders' attempts to control the country's neighbors haven't ended well, and Germans are wary of being seen as trying to dominate Europe diplomatically or economically even today. That's one reason they embraced the dream of European integration and backed the euro, a shared currency, to begin with.
Yet whether anyone likes it or not, Germany is dominating Europe. While the other major economies of the region--France, Italy, Spain and the U.K.--have stumbled out of the Great Recession, the German economy is probably the strongest it has been since the post--Cold War unification of East and West Germany in 1990. The reasons are hard work and thrift. As its neighbors gorged on cheap credit and built too many houses during the pre-2008 go-go years, Germany was busy reforming its economy. Policymakers liberalized the labor market to boost job creation, corporate managers invested in technology, and unions accepted changes in work rules that lowered costs. That experience has influenced Berlin's approach to the euro-zone debt crisis.
The solution, from Berlin's perspective, is for weak economies of the euro zone to become stronger--in other words, more German. But can they? In Greece, persistent demands by Germany and its euro-zone partners for ever harsher budget cuts, tax hikes and other austerity measures are pushing the nation closer and closer to complete economic and social upheaval. The Greek economy contracted by a staggering 7.3% in the second quarter of 2011; angry protests have become a regular feature in the streets of Athens. Meanwhile, the steps taken so far to support the euro haven't squelched the contagion spreading the crisis across the euro zone. With giants Spain and Italy badly infected, the entire monetary union could unravel.
Merkel could fix things by backing her words with action. Though she has declared, "If the euro fails, Europe fails," she has been reluctant to wholeheartedly devote German resources to the euro's cause, which is the kind of commitment markets want to see. Her caution is in part a response to anger at home. German voters oppose seeing their hard-earned euros diverted to rescuing neighbors they perceive as lazy, profligate and irresponsible. When Börsennews, an online stock-market portal, asked financial experts in a September poll if Germany should support eurobonds, 93% said no.