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Spanish bailout, Greek elections make June a make-or-break month in debt crisis

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On the other side are the Germans, who first want reforms and a commitment to centralization of power in Brussels. In the middle are the French, who want more fiscal integration without ceding French sovereignty.

To Americans, it has always been a mystery why the rich Europeans (especially the well-off Germans) don’t simply quell the crisis with overwhelming force – the force of money and the power of a more federal Europe.

Many financial analysts believe the German preference for a delay in responding to the debt crisis has been too costly. Yet the Germans, who account for less than 30 percent of the eurozone’s output, have always felt too weak to carry the whole load of rescue and reform. They enlisted a powerful ally: the markets.

Without the pressure of the markets, Chancellor Angela Merkel’s team believes, there will be no structural reforms in southern Europe. And there will be no market pressure without limits on German largess. Too much help creates a moral hazard: Why reform when the Germans pay anyway? This concern created the German strategy of brinkmanship. It has been a perilous approach, but it has also forced reforms across the continent.

Now, a turning point has been reached. More brinkmanship and more delay risk tearing the currency union apart. And so the Germans are backing fiscal federalism – at least in principle. They now agree to the idea of centralizing bank oversight.

In the end, however, fiscal federalism requires Germany and her northern allies to share part of their wealth with their southern brethren. That is what they still resist. They fear that jointly financed bank bailouts as well as joint deposit insurance for banks will create joint and several liability across the continent – the first step on the way to the “eurobond” that they so detest.

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