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Busch: Germany Takes Critical Step

Monday, 24 May 2010 | 10:38 AM ET

It seems I spend more and more of my time thinking about leadership and expectations.

The combination can be an amazing positive force in not only personal, but public lives.

When action/inaction stems from low expectations and translates into lack of action, the outcome can be just as powerful. Europe is a perfect study of both cases.

I think by now, most everyone is familiar with the dishonesty of the Greek government’s fiscal position as well as the Greek taxpayer’s propensity to avoid paying what is legally required.

Both have been stunning in their brazenness and stunning in the negative impact towards European debt and equities. Clearly, both felt they could game the system and be rewarded with the fruits of belonging to a group that they cheated to gain entrance into and cheated to remain in the club.

For Greece, the process lasted 10 years, but it finally caught up to them.

It’s like a student coming out of university having never worked, with loads of credit card debt, then being surprised when no one wants to hire them.

Did they think that the world was going to give them a free pass and further enable their bad behavior? Employers and lenders have a funny way of looking at this: they offer neither employment nor more money.

German Chancellor Angela Merkel
John MacDougall | AFP | Getty Images
German Chancellor Angela Merkel

In the northern part of Europe, the country that led the rest of the continent into the European Monetary Union is taking ownership of the group and leading by example.

First, PM Merkel did something wildly unpopular by agreeing to fund a program to keep the union intact.

While this will initially create the conditions for moral hazard, Merkel also presented a 9 point list of changes that need to be made to the group to ensure its sustainability including a provision for enforcing the rules.

While this may not come to fruition immediately, the Germans went beyond proposing action by taking action in their own country.

The European Debt Crisis - See Complete Coverage
The European Debt Crisis - See Complete Coverage

Wolfgang Schauble, finance minister, announced that a plan to reduce their budget deficit from 5% to the EMU’s required 3% by 2013.

The cuts are expected to be E10bn a year until 2016 and are to reduce Germany’s record E80 in borrowing.

Merkel is showing the rest of Europe that they are serious about their own deficits and are serious about the rest of Europe following their lead.

This is exactly what investors and debt holders need to see coming from Europe: strong leadership to raise expectations that will achieve high goals.

Change won’t occur overnight, but this is the strongest step taken in the crisis and may be the critical step towards resolving the problem of the group.

It’s simple, but effective: leading by example.

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Andrew B. BuschDirector, Global Currency and Public Policy Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. You can comment on his piece and reach him hereand you can follow him on Twitter at http://twitter.com/abusch.

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