Two popular views of Germany have dominated the current debate about the European financial crisis. Both are wrong. The first view sees Germany as an economically virtuous island in a sea of European profligacy. This is the view of most German voters and of their chancellor, Angela Merkel. In this view, Germany was industrious and prudent while others (Greece, Ireland, Hungary) were profligate. Therefore, these countries should rebalance their accounts without a “bailout” from Germany. This view conveniently ignores that German firms and banks financed these imbalances and that absent external demand for German goods and capital, Germans would be poorer. To put it bluntly, Germany can profitably do what it does only if most others do not.
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