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Germany calls Europe to attention

As Europe's leaders meet, they face German pressure for each eurozone nation to steel itself for a 'stress test' of wobbly banks. National self-discipline, not more German bailouts, will help cement the EU's economic future.

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    Germany's Chancellor Angela Merkel poses for a photo during an European Union summit in Brussels Oct. 24.
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If a big question mark were hanging over the global economy, it is over Europe. The Continent’s emergence from a three-year recession is still very much in doubt. On Thursday, the European Union’s leaders met in Brussels to try and lift those doubts, especially over Europe’s troubled banks.

The biggest concern is whether nations with the worst bank woes, such as Italy, Ireland, and Spain, have learned enough lessons from the 2009 financial crisis.

Germany does not think so. It prefers that each country, not German taxpayers, be the primary backstop for what it calls Pleitebanken, or busted banks. These are banks saddled with loans that, in hindsight, should not have been given out in the first place, whether in housing or in ill-conceived start-up companies .

Recommended: What would happen if Greece exited the eurozone?

Starting next month, the EU plans a “stress test” of 130 banks to reveal the extent of bad loans that will probably not ever be repaid (“nonperforming”). When the test results are known for this “asset-quality review,” Germany does not want national leaders to come looking for more handouts from Europe-wide institutions. The bill could be as high as $69 billion.

“People doubt that we have learned all the lessons from the last banking crisis,” says German Finance Minister Wolfgang Schäuble.

The Germans are not being stingy. They know that each of the 18 eurozone countries must learn from experience and make internal reforms that will stick and prevent another crisis. Many loans will need to be restructured or closed out.

Quoting Mark Twain, Andreas Dombret of Germany’s central bank told an American audience last week: “A man who carries a cat by the tail learns something he can learn in no other way.”

The 28-member EU, whose unity has frayed during the crisis, needs the smaller group in the eurozone to succeed. The EU must be in sync on its financial health to hold the union together. That is not easy when half of its 19 million unemployed people have been without a job for more than a year. And the two anchors of the EU, Germany and France, appear to be drifting apart on EU reforms.

Germany has been generous in helping the governments of Greece, Ireland, and other troubled members get a handle on their huge sovereign debts. Each of these countries now shows signs of growth and fiscal responsibility. With that, the EU feels more confident tackling the more hidden and perhaps larger problem of bad bank loans.

Europe must “rebalance” itself to remain a competitor with the United States and China. “To succeed, Europe as a whole has to become more dynamic, more inventive, and more productive,” says Mr. Dombret.

Letting each eurozone nation solve its banking mess will help ensure that lessons sink in, drive momentum toward more reforms, and develop national self-discipline in finances. Knowing the right way to pick up a cat will eventually help Europe find the stable monetary union it still hopes for.

Recommended: What would happen if Greece exited the eurozone?
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