How Germany's Enlightened Self-Interest Saved Greece

Last Updated May 4, 2010 8:54 AM EDT

The noble-sounding phrase "enlightened self-interest" fronts for hardheaded calculations about whether something will deliver long-term benefits that outweigh the short term cost. Haltingly, Germany came to this conclusion in deciding to help rescue Greece, and it's a story you've seen before.

Did you like it when the United States bailed out Mexico in 1996? How about the rescues of various Asian countries during the 1997-98 financial crisis there? Probably not, but you would have liked it even less if major export markets for U.S. businesses had broken down entirely.

So it is with the Germans, who hold the key to Greece's rescue, and are going to use it later this week.

In truth, there's nothing to like about these episodes, and they trigger a reflex inside any self-respecting capitalist that demands accountability. You borrow too much money? Find your way into Chapter 11!

But when you look at the numbers, other realities emerge.

The financial system was already weak when Greece started tottering toward default. Is it really the best idea to take a whack at the Greek assets they hold? No major bank in Europe stayed away from Greek assets, and no major U.S. investor stayed away from European banks.

(Banks and investors, of course, bear some responsibility for the Greek situation, since they lent the money, or underwrote the bonds for a country with a track record of defaults. And it is a scandal that they aren't doing more to alleviate the crisis by writing down part of the debt and recapitalizing themselves.)

Also, one way or another, Greece will pay for its profligacy.

The IMF and the European Union want to force Greece to cut spending worth about 10 percent of its gross domestic product over the next two years. That is probably a take-it-or-leave-it proposition. Greece is more or less a failed state, but the government will have to pull a rabbit out of the hat, or face the withering judgment of history.

Which brings us back to the Germans, the traditional paymasters in times of European crises.

German Chancellor Angela Merkel hesitated to bail out the Greeks ahead of an election in Germany's most populous state on May 9 because the move is deeply unpopular. Still, its parliament is certain to approve the rescue on Friday.

The unpopularity stems from Germany's own recent history. Contrary to the image you might have of wimpy continentals living off the welfare state, the Germans have buckled down over the past 10 years and regained the competitiveness they had lost after the unification of East and West Germany. Workers took pay freezes or cuts. Businesses put more money into R&D. The government, until the financial crisis, had about balanced its budget.

But when you factor into this picture Germany's role in the world economy as a major exporter of capital equipment to still-modernizing countries, you get a very different picture of its relationship to Greece. It is not dependent on Greece, but Greece-like countries that would also face crisis if Greece defaulted, such as Portugal, Spain, Italy and Ireland.

No wonder that a prominent German industrialist has started a public relations campaign to promote the purchase of Greek bonds.

German engineering is nothing without customers who are there for the long term. Recognizing that, though, takes enlightened self-interest.

Photo from Michael Dawes via Flickr

  • Carter Dougherty

    Carter Dougherty, a former economic correspondent for the International Herald Tribune and The New York Times, is fascinated by the intersection between policy and business, in the United States and abroad. He shared in a Loeb Award, business journalism's most prestigious, while at the NYT. But he still looks back fondly on his days trudging through central Africa, reporting on Congo, Darfur and other rough spots.