How Germany Can Make or Break the Euro

03/18/2015 02:28 pm ET | Updated May 17, 2015

To get a sense of how the eurozone is handling its latest economic crisis, look no further than this key question: How is Germany handling the crisis? The nation has emerged as the strongest leader in the region, and its enormous economic clout is putting Germany in the incredibly influential position of deciding how the currency union will clamber out of the current situation.

The eurozone's largest economy, Germany can essentially "make or break" the euro, especially now at this critical juncture of the crisis. Though Germany isn't the only European country doing well economically, it's the biggest one in the eurozone. And that heft is putting Germany in the role as "rule-maker -- providing order and discipline," notes Wharton finance professor Bulent Gultekin.

It's a no-nonsense approach that has rattled some countries, especially southern European nations that are struggling under the weight of numerous burdens, including austerity programs championed by Germany. Many are questioning whether Germany's severity will lead the eurozone to a confident economic recovery -- or leave it cracked beyond repair.

'Germany Has the Checkbook'

Currently, Germany is the fourth-largest economy in the world and the strongest in the 19-member euro bloc, not only in terms of its growth rate, but also its size. "Germany has the power now because it has its own house in order. Austria, Denmark and the Netherlands are doing well, but they certainly don't have the size Twitter," says Mauro Guillén, Wharton management professor and director of The Lauder Institute. "Germany has the checkbook."

Germany, by most measures, is successful. The country is experiencing slower economic growth than the U.S. and the U.K., but is still expanding. The Germans regard themselves as a model for the rest of the eurozone, and leadership there wants to apply that same model of fiscal rectitude to the other countries, predicting that economic success will follow, adds Franklin Allen, Wharton finance professor.

Germany "believes austerity is the solution,"Guillén says. "I think there's no question that austerity eventually works, like in 10 years. Meanwhile, you have lots of hardship and high unemployment."

According to Wharton finance professor Joao Gomes, Germany thinks the struggling economies need to shape up with structural reform and strict budget cuts. "Germany wouldn't call it austerity; they call it reforms,"Gomes notes. "They want to focus [household spending on] what really matters and cut out the extraneous stuff. If people want to spend on things they can't really afford, that's not a growth model."

While many economists support the Keynesian view that public sector investment can shore up the economy when the private sector is shrinking during a downturn, German Chancellor Angela Merkel has been leading the country with the belief that the government has a very limited role, andmarkets can operate freely in a social market economy. "They have a particular view of the world, and they want to impose that on other countries, in effect,"says Allen, who is also a professor at Imperial College in London and head of its Brevan Howard Centre

When the International Monetary Fund first helped Greece in 2010, that support was presented as a bailout. But IMF executive director Paulo Batista told Greek Alpha TV in an interview that the "IMF gave money to save German and French banks, not Greece. In reality, it was more of a bailout of the private creditors for Greece. It required a lot of sacrifice from Greece and not enough sacrifices from Greece's creditors. And I think this needs to change going forward."

"I have considerable sympathy for the Greeks, but I don't think that you can blame their plight on the Germans," says Richard Herring, Wharton finance professor and co-director of the Wharton Financial Institutions Center. "Their problem was years in the making, and it is largely attributable to their poor economic policy-making since they joined the euro. The current problem is that given the constraints of being a member of the euro system, they simply don't have powerful enough tools to mitigate the painful cuts in aggregate demand. As members of the eurozone, they cannot change their exchange rate and have no control over monetary policy. That means they must rely on tightening fiscal policy or default," he notes.

More than a decade ago, Germany was in the fiscal dumps with a deep recession. "Germany realized that it needed a long-term plan about how the country was going to grow when it went throughreunificationand went through serious questions about who it is and how it is going to compete in the next 10 to 15 years,"Gomes says. "Germany went through major reforms to increase productivity and manufacture goods the rest of the world wants."

To continue reading my article on Germany's role in the eurozone crisis, go to Knowledge@Wharton.