It is a question that will decide the fate of the eurozone. The current spat over the bailout of Cyprus underlines the level of mistrust and growing antipathy between Berlin and the “Club Med” countries.
For many in the periphery countries, the Germans have become the pantomime villains of the never-ending eurozone saga.
The unprecedented steps taken by ECB president Mario Draghi last September to preserve the euro has calmed the bond markets. However, there is still a lot more to be done before the region starts functioning as a coherent and viable economic entity.
Berlin insists that beleaguered member states must pursue a path of austerity and structural reforms to restore economic health.
However, there is a growing anti-austerity backlash in periphery countries. Rome and Madrid want core eurozone countries to inject a fiscal stimulus in an effort to spur growth. They also want some form of debt mutualisation in the form of eurobonds.
Merkel has ruled out eurobonds in her lifetime. Indeed, member states would have to agree to much closer fiscal and political integration before the German government would veer from its current policies.
However, with mutual recriminations between “Club North” and “Club South” mounting on a daily basis, the chances of agreeing any new treaties in the near to medium term look slim. What are the chances of this country, for example, passing a referendum on anything to do with the EU in the current environment?
The truth is there is blame on both sides. Germany has been the single biggest contributor to the bailout funds that have come to the rescue of Greece, Ireland, Portugal, and now Cyprus. It is right to insist that structural reforms and improving competitiveness is the cornerstone of policy in these countries — otherwise the moral hazard risk would be enormous.
However, when Germany was reunifying East and West in the early 1990s, the federal government ran a series of budget deficits to facilitate the process. Yet now it is implacably wedded to fiscal consolidation when other countries are faced with similar challenges.
In the absence of eurobonds, the eurozone needs a properly functioning banking union if it is to survive. It is not enough to have a single supervisory mechanism. It must have an effective resolution regime, deposit guarantee scheme, and backstop in the form of a well-capitalised ESM.
If this had already been in place, Cyprus would not have needed a sovereign bailout. But the stakes are much higher with Spain and Italy. Both have creaky banking systems. If there isn’t a proper banking union in place, the markets will once again turn on the region.
Germany must do its part. But with federal elections looming in September, risks are firmly on the downside.
* John Walsh is business correspondent with the Irish Examiner