Until just recently, Germany was more indebted than Spain. The country was the first, along with France, to breach the Maastricht Treaty’s 3% hurdle for annual deficits in 2005, prompting a change in the rules. And Germany has also been in violation the Maastricht Treaty’s stability and growth pact provision on government debt to GDP. In sum, the German government’s macro financials are not significantly better than those of other major European countries like France and Spain.
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For me, this story of impending German austerity highlights the basic problem with the euro and how it mandates a deflationary, contractionary policy response to economic crisis. Moreover, I believe the story is credible and makes clear that the euro sovereign debt crisis will continue to be a problem for months and years to come.