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Germany: Responsible for Europe's crisis?

Germans are shocked to hear their thrifty ways blamed for causing the euro's instability.

An employee of German luxury car maker BMW polishes the company's logo on the hood of a BMW Z4 sDrive during an annual results press conference on March 17, 2010 in Munich. BMW said it expected a 'notable' increase in net profit this year after managing to end 2009 in the black despite a global sector crisis. (Joerg Koch/AFP/Getty Images)

BERLIN, Germany — In a deal struck at the end of February that's expected to serve as a model for the rest of the country, Germany's robust engineering sector will next year see its smallest wage increase in over a quarter century.

The agreement is a done deal, but its import is still being hotly debated. Most Germans see it as a sign of their preparedness to make painful concessions to the realities of the global financial crisis. To their neighbors in the European Union, though, it's a doubling-down on policies that have lead to the continent's currency crisis.

There are many reasons that Germany is considered Europe's soundest economy. Not only does it enjoy the EU's largest GDP and the status of world's second-biggest exporter, but its government has generally not allowed itself the extraordinary budget deficits that are threatening economies elsewhere on the continent. It's not for nothing that European statesmen expect Berlin to lead efforts to keep afloat crisis-ridden Spain, Ireland and Portugal, while designing a bail-out package to prevent Greece from defaulting on its sovereign debt.

But few imagine that Germany will acknowledge the role it has played in enabling these very problems. Germany's dominance in exports has come about, not least, because policymakers in Berlin have been willing to artificially hold down domestic demand over the last 10 years, a choice that has come at the expense of other countries in the EU. By voluntarily accepting modest or non-existent wage increases, Germans have kept the prices of their products low.

While that has meant more foreigners have been willing to buy from Germans, it has also resulted in ordinary Germans both having less money in their pockets to buy products from abroad and feeling less disposed to spend their money freely. The results have been predictably lopsided when it comes to trade relations with other European states: In 2009, for instance, Germany exported 6.7 billion euros worth of goods to Greece, but imported only 1.8 billion euros worth in return.

It's not currency manipulation exactly, but it is not a policy that has encouraged Europe's weaker countries to grow in responsible, sustainable ways. Other countries, failing to feel much of the positive effect of Germany's responsible behavior, tapped into the one benefit to which they did have access — namely, low interest rates on borrowing. Greece relied on state spending to drive growth, while Spain allowed itself to be carried away by a housing bubble. These policies were further bolstered by the decision of many Germans to directly invest their saved money in the foreign bond and housing markets.

Now that the bubbles have burst, Berlin expects the profligate countries to deflate their economies to match their real productivity. Since devaluing the currency isn't an option for individual eurozone countries, this amounts to Berlin ordering wayward European capitals to begin a painful process of deflation and accept a reduction of living standards, all while Germany maintains its course.