Any way you slice it, Germany wins

June 7, 2012, 5:03 PM UTC

In the driver’s seat: German Chancellor Angela Merkel

FORTUNE — The faster Europe realizes that Germany holds most, if not all, of the cards when it comes to ending the eurozone debt crisis, the faster a lasting solution can be found. With positive economic growth, low unemployment and fantastically low interest rates, Germany is simply in no rush to implement reforms that have been proposed by its economically weaker neighbors, as they would negatively impact Germany’s ability to borrow cheaply and expand exports.

The only way the EU’s biggest member can be convinced to take on reforms, like issuing eurobonds, would be if it were granted incentives, such as control over the fiscal policy of the eurozone. Other members of the eurozone, namely France, have been wary about handing more of their economic power over to Brussels and ultimately to Frankfurt. But while solutions like the pooling of eurozone’s existing debt is a good first step to diffusing the crisis, they still require incentives for Germany to get on board.

Since the start of the crisis, Germany’s chancellor Angela Merkel has been accused of dragging her feet when it comes to ending the eurozone crisis. Headlines like, “Where is Germany?” or “Merkel’s failure to lead,” have graced newspapers on both sides of the Atlantic.

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But unlike nearly every other eurozone leader, Merkel hasn’t been thrown out of power since the crisis began more than two year ago. While that is due in part to election rules in Germany, it is also due to Germany’s economy, which, while a little wobbly now, has actually improved since the crisis began in 2010. That year, Germany’s GDP grew at 3.5% – much faster than its neighbors. In 2011, it grew at 2.7% at the same time most of its neighbors slipped into recession. And while economists had predicted a terrible first quarter for Germany this year, its economy actually grew five times more than expected, at 0.5%.

That might seem puzzling given that many of Germany’s main trading partners are crippled eurozone members, but the country seems to have benefitted greatly from the weakening of the euro, since it has increased the competitiveness of its exports in non-eurozone countries. Unlike the rest of the eurozone, Germany is an exporting powerhouse, making high-quality goods that are in demand across the world. The eurozone crisis has ironically only increased its export strength, continuing to make it the world’s second-largest export economy in the world, behind China.

At the same time, Germany has also benefitted from an increase in investor demand for its debt. Germany has a debt-to-GDP ratio of around 80%, which is higher than troubled Spain at 68%, yet its debt is trading at zero, while Spain’s debt is trading near 7%. Demand for German debt was so great this month that at some points it actually traded at a negative yield. Investors buying this debt range from German banks to U.S. pension funds. But the big surge in buying lately has come from Spanish and Greek depositors who are frantically withdrawing their life savings and putting them in German bonds on fear that their respective governments will leave the eurozone and destroy their savings through devaluation.

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The low interest rates and the strong economy have translated to a record low unemployment rate for Germany, post-unification, of 5.6%. Gone are the days where 10% unemployment was the norm – if you don’t have a job in Germany these days, you just aren’t looking hard enough. Compare that with France, which has an unemployment rate that is almost double that of Germany at 10% or Spain, which is nearly five times higher at 25%.

There are many structural reasons why Germany is experiencing economic growth while its neighbors are floundering. But the point here is that Germany, despite the fire burning around it, is doing pretty darn well economically. So would you blame chancellor Merkel for not trying to rock the boat here?

A coalition of eurozone members – led by France, Spain and Italy – is pushing Germany to agree to the creation of a common debt instrument for the eurozone, known as a eurobond, in an effort to stabilize borrowing rates for member nations. The pressure has increased now that France is led by a socialist government in favor of deficit spending. The hope is that a common debt instrument will allow weaker members to borrow at low rates to fund projects meant to stimulate economic growth and stabilize the euro’s value.

Germany doesn’t disagree with that assertion – it just doesn’t see any upside in going along with the plan. Let’s take a look at what eurobonds could do here. First, they would most likely stabilize and strengthen the euro against other currencies. While that would be good for the international currency markets, it would hurt Germany’s export industry. Second, eurobonds would make it easier for countries with poor credit ratings to borrow at cheaper rates. This is done by extending the good credit of the core members to those on the periphery with bad credit. As one of two AAA-rated countries in the eurozone, the other being Finland, Germany will undoubtedly see a downgrade in its credit rating if eurobonds were issued, translating to higher borrowing costs at home. And lastly, eurobonds would allow France to borrow more money at lower rates, which will go to fund its budget deficit as well as grand projects to stimulate its weak and inefficient economy. Again, this benefits Germany how?

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Another, less severe, proposal that has been making the rounds in Brussels would be the pooling of all eurozone debt into a common fund, which would be paid down by all members over 25 years. This idea seems to be an even worse alternative to eurobonds as it solves the past debt problem but does nothing to fix the fiscal inefficiencies and budget deficits that plague nearly all eurozone members. This would be a good first step to ending the crisis, but it isn’t the cure. In a few years the eurozone will be back just where they started, only with a larger overall debt burden and weaker credit. At that point not even Germany could save the euro.

France and the rest of the eurozone need to wake up. There is no way Germany will ever agree to the pooling of eurozone debt or to the issuing of eurobonds if it won’t have a say in how member states run their budgets. This crisis has dragged on so long because the two sides of this issue have been starring at each other hoping that the other side would blink. The periphery, which now includes France, wants the crisis to get so bad that the common currency would be near collapse, which would then force Germany to relent and bailout the continent. On the other side of the table, Germany is hoping that austerity and weak economic growth gets so bad that the larger members of the euro finally relent and give up some, if not all, of their fiscal power to an EU body, which will ultimately be dominated by prudent German technocrats.

Germany seems to be holding strong as it knows that it can continue orchestrating piecemeal bailouts of the periphery with the IMF and the ECB to make sure that the euro doesn’t collapse. In the meantime, it will continue to benefit from the troubles in the eurozone. On the other hand, it looks like many members of the periphery are about to blink. Spain’s prime minister, an advocate of eurobonds, said this week that he would now be in favor of transferring some sovereign fiscal power over to the EU. That leaves just France and Italy to get on board. The quicker they acquiesce to Berlin, the quicker they can get their eurobonds.