Contrary to the popular narrative, Germany may not have the financial resources and strength to rescue the peripheral nations of the eurozone. Germany is indirectly exposed through its support of various official institutions such as the European Union, European Central Bank, the International Monetary Fund and specially bailout funds. The exposure of the ECB to Greece, Portugal, Ireland, Spain and Italy is €918bn (£740bn) as of this April.
Germany's guarantees supporting the European Financial Stability Fund are €211bn and will increase if Spain and Italy require assistance and cannot act as a guarantor.
The European Stability Mechanism, the replacement to the EFSF which is planned to commence next month, will require a capital contribution from Germany which will push its budget deficit from €26bn to €35bn. If the ESM lends its full commitment of €500bn and the recipients default, Germany's liability could be as high as €280bn.
The largest single direct German exposure is the Bundesbank's more than €700bn current exposure under the Target2 (Trans-European automated real-time gross settlement express transfer system) to other central banks in the eurozone.
It is in this light that we need to consider the on-off latest proposition that the ESFC and the ESM should be allowed to fritter away their resources on acquiring Spanish and Italian bonds.
How did we get into this mess? Well that's another story ...