As a metaphor for the current relationship between Germany and Greece, the German national soccer team handily beat its Greek opponents, 4 to 1, in a quarter final match of the European championship on Friday, June 22nd. Outgunned economically by German industrial and financial might, the Greeks hoped for an even match on the football field. Alas, here too Greek bravura proved no match for German precision. Adding insult to injury was the sight of Chancellor Angela Merkel cheering the German squad on to victory.

Now, based on coverage here in the United States of the European economic crisis, one would be forgiven for having the impression that, outside Germany, Chancellor Merkel is widely despised and reviled. The mainstream press portrays Merkel as the Eurozone's Herbert Hoover, insisting on austerity despite all indicators screaming for more fiscal stimulus, and fast. She is also depicted as afflicted with the worst qualities of the stereotypical Prussian Junker: a fanatical martinet who cannot be persuaded by reason to pursue the obvious course.

 

 

Yet, Chancellor Merkel is highly regarded by the man on the street in Paris, London, Prague, Madrid and Warsaw. Greece aside, she is widely given high marks by other Europeans for her handling thus far of the debt and economic crisis. In a poll conducted by the Pew Research Center (as part of a study of European perceptions of the benefits of economic union and monetary integration), most respondents, regardless of nationality, singled out Merkel among other heads of state for her leadership. Among the French, the Pew survey reported 76 percent of those polled thought her handling of the crisis was very or somewhat good. Among Poles, Spaniards and Italians the tallies were 66, 63 and 55 percent, respectively. Of the nationalities polled, only the Greeks gave Merkel low marks for her leadership.

Knowing her origins helps to understand Angela Merkel's dogged insistence on microeconomic reforms and fiscal austerity. Merkel hails from the Östern Länder — the five states in the Bundesrepublik which (before reunification in 1990) constituted East Germany and long before that Prussia. Unlike a number of her parliamentary colleagues who also trace their roots back to the former communist state, Merkel moved to the right of the political spectrum after reunification. In doing so, she effectively renounced not just the policies of the failed communist state, but also a longer tradition of socialist equality, still revered, not only in Germany but in most other European nations. Today, she leads the Christian Democratic Union (CDU), one of the two major center-right political parties in Germany.

Her experience growing up and coming of age in the former Deustche Demokratische Republik (DDR) coupled with the challenges of integrating the former Östern Länder economically into Germany have certainly colored her world view. We contend that Chancellor Merkel knows all too painfully that throwing money at a problem is no solution. Fiscal stimulus may work in the short term but it seldom creates jobs long term.

Over twenty years and billions of Euros later, Germany still confronts an economic divide between east and west. Good intentions complicated what in the best of circumstances was bound to be a difficult transition. The decision to exchange Ostmarks for Deutschemarks at parity, while politically expedient, guaranteed the economic shock needed to revitalize the antiquated and unproductive economies of the Östern Länder never occurred.

In this light, Chancellor Merkel's insistence on the hard choices not being deferred makes sense. A financial rescue without immediate action guarantees the painful sacrifices will never be taken, increasing the final cost to all involved. Perhaps, when time passes and tempers cool, a tourist to Athens may stumble upon a street named in honor of the steely German Chancellor who prevailed on the Greeks to set their fiscal house right.

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American Independence Financial Services, LLC ("AIFS") is the investment adviser and administrator for the American Independence Funds and the NestEgg Target Date Funds. The firm is a limited liability company founded in 2004.

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