Germany, the economic vanguard of the EU

Investors still bet on Germany

    There is little doubt that uncertainty will hang over aid to Greece. The country is still stymied by popular unrest over proposed austerity measures, and no one is sure how long it will take for the country to get its fiscal house in order.

    But the crisis has made completely clear to investors that Germany is the true economic powerhouse of the eurozone. That means its the most influential country on the Continent, but more importantly, it's the nation most worthy of foreign investment as well.

    Investors who have not sought the safety of Treasuries are moving out of peripheral European government debt and into German sovereign bonds. John Higgins, a senior markets economist at Capital Economics, wrote in a recent note that he sees continued support for highly rated German government bonds. "With core inflation in the euro-zone also set to remain very subdued, we think 10-year German Bund yields could fall even further over the summer, to around 2.5%, and stay low through the remainder of this year and next," he writes.

    Eventually, the smoke will clear, and stability is likely to return to Europe as a whole. But what will that Europe look like, and what role will the country that bridges east, west, north and south, look like?

    There is an understanding that the eurozone can't get into this situation again, says RBS chief forex strategist Alan Ruskin. So Germany may be able to push other countries to agree to create new parameters that keep deficits from increasing to these levels.

    More radically, Germany and the EU may realize that they are trying to hold together a system with too many structural problems. "At some stage, Germany may well opt for a different approach," says PIMCO chief executive Mohamed El-Erian. "Should this happen, and it is not guaranteed, Germany could opt for a smaller [eurozone] consisting mainly of countries with similar approaches to Germany when it comes to economic policy formulation and implementation."

    In other words, even though Germany will help the PIIGS now, it may not be willing to tolerate them forever. Chances are that when that day comes, no other country in Europe will have the economic clout to say otherwise.