Germany holds all euro-zone cards
Euro-zone officials have been discussing preparations by member states for a possible Greek exit. That is a signal to Asia to prepare for an outcome to the euro crisis sooner rather than later. The decisive moments will come next month, first with fresh Greek elections and then a European Union summit. Neither is likely to produce good news for Asian economies. Greek voters are expected to again reject German-imposed austerity policies in return for a massive bailout. If as a result Greece leaves the euro zone and defaults, the worry would be contagion and pressure on other debt-stricken southern European members.
Germany's stance in the lead-up to the summit is therefore crucial. To head off a Greek exit - and ultimately the threat of a break-up of the euro - Germany and other northern states would have to accept the need to subsidise weaker southern neighbours.
Both scenarios pose risks for Asian economies including Hong Kong's, the first through market volatility and knock-on economic effects, and the second through inhibiting growth in the world's second largest economy, China, given the EU is its biggest export market.
Meanwhile, investors are jittery, causing stock indices to gyrate, and the euro fell to near-two-year lows amid a flight to safer currencies by fund managers. After German growth saved Europe from a double-dip recession in the first quarter, indications are that it may not do so again in the second quarter. Leaders are openly discussing the future of the euro.
The dynamics of European leadership changed with the result of the French presidential election, on the same day Greeks swung heavily behind anti-austerity candidates. In France, too, voters rejected the austerity policies of former president Nikolas Sarkozy, an influential partner of German chancellor Angela Merkel in leadership of the euro zone. Whereas they once conferred privately ahead of European summits to establish a common position, Germany now stands relatively isolated. Indeed, new French president Francois Hollande supports common euro zone bonds to ease funding problems for stressed economies and stimulate economic growth. Sadly, however, there is no sign of a softening of Germany's opposition to a sharing of the debt burden in this way, which could raise Germany's borrowing costs.
While fiscal discipline is essential to sustainable recovery in Europe, there must be an economic growth factor if weaker countries are to emerge from a debt trap and unity is to be safeguarded. Despite the turn in French public opinion, Germany and France continue to share responsibility for euro-zone leadership in a crisis. They must work to bridge their differences for the greater good.