Germany looks strong only because other European countries are so weakby Josef Joffe / September 17, 2015 / Leave a comment
It is bailout number three for Greece. The fourth will follow unless Europe—make that Germany—forgives half or more of Athens’s unpayable debt. Forgiveness from Germany, that cruel disciplinarian? Of course. Berlin will agree to the inevitable “haircut,” as it has yielded on the three rescues totalling €300bn, which raises a delicious paradox. Whatever Chancellor Angela Merkel’s oracular pronouncements or the acerbic asides from her Finance Minister Wolfgang Schäuble, Deutschland always acts as the good “Europayer.” Yet goodness does no good. Berlin remains Europe’s ogre, hounded by the Anglo-American keepers of the Keynesian seal and trashed by the chattering classes from the Bay of Biscay to the Aegean.
Go figure. Among the hoi polloi, as a BBC poll in 2014 found out, the Germans are the world’s best-liked people. Among their betters, by contrast, Germany is the new America, the country they love to hate. For power does not breed love, and both are number one in their bailiwicks—Berlin in Europe, Washington in the world. Both are cast as princes of darkness, as bastions of might and malice. If they do right, it is for ulterior motives. If they throw their weight around, it is proof of irreducible hauteur. In Europe, anti-Germanism is now the younger brother of anti-Americanism.
Power does bite, but there is often less of it than meets the fearful eye. This truth should serve as the subtitle of “The Money War,” the unending drama over Europe’s common currency. Ever since 2010, when Greece had to be dragged from default for the first time, Geldkrieg has replaced Weltkrieg. By now, the feud has lasted longer than the First World War. And like the Great War, the battle over the euro is a tale of great expectations and not so great power, especially on the part of Germany.
“Weighed and found wanting” is as counter-intuitive as it can get. Isn’t Germany Europe’s hegemon once again? To crack the puzzle, a historical flashback is in order. The fuse was lit a generation ago, long before the clash of 2010. Three decades before it traded the mark for the euro, the Berlin republic had a good thing going. This was an informal Deutsche Mark bloc corralling the Benelux countries, the Scandinavians, Austria and Switzerland. It was primacy without responsibility, and nice for three reasons. With its currencies tied to the mark, this northern, mainly Protestant tier softened the relentless revaluation pressure bedevilling the almighty Deutsche Mark, its value doubling against the dollar by the mid-1970s. As the mark climbed, the other currencies rose in tandem, keeping bloc parities in line. Second, this kind of cordon sanitaire delivered a much better fit for the German economy than the current eurozone or “euro-19”. Compared to “Club Med,” the southern tier, it boasted competitive economies, efficient administrations and political cultures more attuned to Teutonic financial rigour.
The best part was this: the Germans could reap the advantages of monetary union without having to pay the costs of maintaining it, as they do in the endless horror story of Athens’ insolvency. The burden of adjustment fell on Berlin’s monetary satellites. Germany was the lead engine, the others chugged along.
Enter the euro. Real monetary union would soon prove that the gods punish those whose wishes they fulfil. Why didn’t Berlin leave well alone, instead of going for the real thing that saddled them with a “suboptimal currency area”—a bunch of wildly diverging economies unable to live under a one-size-fits-all monetary regime?
Many observers explained back then that the euro was actually a political currency: Germany’s gift to its neighbours, France above all, in order to compensate them for the sudden accretion of German power after reunification in 1990. The nation was now whole again, its security dependence on the west dwindling along with the Soviet occupation armies east of the Elbe River, whence the last soldier departed in 1994. The old order was gone. Now, Germany’s clout would finally match its size and economy, both the biggest in Europe.
There is some truth to this account, but the decisive point was to cobble together a Deutsche Mark bloc writ large. The logic was simple. Two-thirds of Germany’s exports, its traditional growth engine, went into the European Union. A single currency would put paid to the devaluation games played by France, Italy et al, and presto, German exports would no longer suffer from routinely cheapened francs and lire. What’s more, the pressure from a cheapening dollar would be diffused across the entire eurozone, not just Berlin’s informal Deutsche Mark bloc.
That was the textbook logic. In practice, the Germans knew full well that “Club Med”—France, Italy, Portugal, Spain and Greece—were not ready, and jaundiced economists warned they never would be: too much statism, too many vested interests and rent-seeking groups, not enough political capital to change ancient social contracts.
Step two in the “Germanisation” of Europe’s money was the imposition of “convergence criteria” that were to rule in the run-up. To establish their clubbability, would-be members had to prove their virtue by cutting inflation, maintaining exchange-rate stability and limiting the public debt. The next step demanded by the German Finance Ministry, was the Stability and Growth Pact prescribing fiscal probity for all time. Yet even the best laid plans can go awry—the Germans could crack the whip, but not win the race. They had mis-measured their power. And the euro made it worse—that is the ultimate irony. In the run-up, “Club Med” and Ireland did swallow the nasty medicine ordered by Herr Doktor. But once they were in, virtue begat vice. Now Italians could still splurge like Italians, but borrow like Germans. The “PIIGS,” as Portugal, Italy, Ireland, Greece and Spain used to be called, no longer had to pay a devaluation premium for francs, lire or drachmas. Denominated in solid-gold euros, bond yields plummeted across euroland. The PIIGS could suck in hundreds of billions at rates just a bit above Germany’s.
A first-year economics student could have predicted what followed. Government spending soared, private borrowing exploded, real-estate bubbles built up—until they burst in the financial crash of 2008. This is where we are, with Merkel and Schäuble in the stocks, pelted by each and all. We need not regurgitate the accompanying epithets, ranging from “Fourth Reich” to “crimes against humanity,” “arrogance” and “imperialism,” with Merkel in Nazi uniform thrown in.
If this “Fourth Reich” really had the power ascribed to it, it would have prevailed, teaching the profligates to reform their uncompetitive economies and practise the discipline they pledged when they joined. It would have imposed real “austerity” on the rest, the bugaboo of Keynesians from the New York to the Financial Times. In fact, the crisis countries are running deficits ranging from three to six per cent even now. A truly hegemonic Berlin would have enforced the Maastricht Treaties that prohibit bail-outs. It would have reined in Mario Draghi, the chief of the European Central Bank (ECB), who defied the ECB’s modest mandate, turning it into a European Fed, an unstoppable money machine pumping liquidity by the trillions.
Instead, the Merkel government left Jens Weidmann, the German martinet on the ECB board, twisting in the wind. It signed on to three Greek bail-outs, the last one in August with an overwhelming parliamentary majority of 75 per cent. This is not how real hegemons behave: protesting and then surrendering. Germany’s diffidence in the euro debacle widens the puzzle. Here is a country blessed with Europe’s largest population, the world’s fourth-largest GDP and a towering strategic position in the heart of Europe. It is universally touted as a giant among nations. So why does Germany keep punching below its weight?
“The rest of the world now looks up to this “dwarf” sitting at the head table of the great powers”
The old cliché about Germany as economic giant and political dwarf is still apropos, though the dwarf has added a lot of size and muscle since the end of the Cold War. Divided no more, the nation has regained full sovereignty while shedding its strategic dependence on the United States, France and Britain. Why defer to them when Soviet shock divisions were no longer at the gates of Hamburg?
Certainly, the rest of the world now looks up to this “dwarf” sitting at the head table of the great powers. A key player in the Ukrainian crisis, Germany upholds the sanctions regime against Vladimir Putin’s Russia. For decades, the Federal Republic had played Prince Phillip to France, always walking a few steps behind; now the consort is the king in the Franco-German “marriage.” Though Berlin is not a permanent member of the United Nations Security Council, it has been ennobled as a member of the “P5 plus 1,” the five nuclear powers plus Germany, that negotiated the nuclear deal with Iran. So why the gap between reputation and reality?
First, Europe’s current power map may produce an optical illusion. Germany looks so strong because the others are so weak. France and Italy are stagnating, unable to reform their ossified markets and anti-competitive labour laws. Economists know what necessity demands. If you can no longer devalue externally, as “Club Med” did endlessly before the euro, you must do so internally by lowering government expenditures as well as wages—or invest massively to raise productivity. Yet unit labour costs, soaring in the lavish pre-2008 euro days, keep rising, as in France and are rising again in Italy. President François Hollande and Prime Minister Matteo Renzi simply cannot muster the strength to wean their nations from living beyond their means. Nor can they take on strategically placed groups that turn privilege into profit.
Spain shows modest growth, but it tends to look to Latin America rather than Europe. Britain is the odd man out, growing at a nice clip. As far as Europe is concerned, its position is one of not-so-splendid isolation. David Cameron has half risen from the European gaming table. The UK wants to cash in its chips, going one better than Margaret Thatcher by demanding not only its “money back,” but also its sovereign prerogatives. Curiously, Britain does not seem to mind that it is once more sitting at the edge of Europe. So that leaves Germany looming over the table.
Former United States Secretary of State Henry Kissinger famously asked: “Who do I call if I want to speak to Europe?” This quote is apocryphal, denied by Kissinger as well as his close associates, but if it isn’t true, it is well invented. A few years ago, Catherine Ashton, then the EU’s foreign affairs representative, quipped: “Yes, Europe does have a number. It is mine. When you dial it, you hear a computer. Press one for Germany, two for France, three for Britain…” Today, the Americans, Russians and Chinese call Berlin. Berlin will pick up, jot down copious notes and then promise to call back. Why doesn’t it just grab the lead, as so many European capitals are pleading? Or at least pretend to do so. Three reasons.
“German grand strategy has largely narrowed to money diplomacy”
First, after decades of “punching below its weight,” to reverse Margaret Thatcher’s dictum about Britain, Germany does not have the foreign policy apparatus that comes with great power. US President Barack Obama has a national security council staff approaching 300, Merkel has a couple of handfuls in the huge “washing machine,” as Berliners wisecrack, that serves as the Chancellor’s office. The Foreign Office is well-staffed, but, as elsewhere in the western world, foreign policy has been usurped by the centre, including Schäuble’s Treasury.
German grand strategy has largely narrowed to money diplomacy. Second, there is the consensus machinery that entraps the nation at the hub. Obama leaves it to innumerable inter-agency meetings to hash out compromises, but in the end, the buck stops at the Oval Office. In Europe, barely a week goes by without yet another EU conclave absorbing the time and energy of the executive.
During the latest Greek crisis, the Chancellor and her Finance Minister had practically moved to Brussels. There was a new Greek ruse every day, demanding tiresome consensus-building in the eurogroup, followed by yet another round with the Syriza government led by Alexis Tsipras. Yes, Germany, the biggest net-contributor to the EU kitty, is more equal than Estonia or Portugal, but its say-so is not fiat—not among the Euro-19, let alone the EU-28. When you think about Merkel, think about the emperor of the Holy Roman Empire and a few dozen kings and princes, not about the American president.
Think also about the huge numbers of refugees and illegal immigrants who have arrived in Europe this year. Most of them want to come to Germany, the country with the lowest unemployment, the most liberal asylum law and the most munificent welfare state. Germany expects 800,000 asylum seekers this year, half of the European total and the equivalent of 4.2m thronging into the US.
As a traditional nation-state, the US could, theoretically, stem the tide on its own. Not so Germany: it is in the middle of the Schengen area that has abolished border controls among some 30 countries, with Britain as a notable exception. Theoretically, asylum must be granted in the country of first entry. In practice, the Balkan countries send them west, Italy sends them north. Hungary is building a fence that will divert those seeking asylum to former Yugoslavia, thence to Austria and Germany. Equity suggests they should be distributed across the EU, but national egotisms shout “no!” Berlin is getting nowhere with its push for a European refugee law. So much for the idea that Merkel is mistress of Europe. This leads to the third and most profound reason why Germany’s vast assets do not translate into power.
To play the game played by Britain in the 18th and 19th centuries, a nation needs an imperial class as well as an imperial culture. Present-day Germany lacks both, however outsized it looks from abroad. Fifty years under the protective umbrella of American strategic power has transformed the political culture beyond recognition. To seek glory, let alone dominion, abroad is not the 21st century German way. Nor does the nation treat force as an integral tool of diplomacy. The current army has shrunk from 680,000 during the Cold War (West plus East Germany) to 180,000, and defence outlays have more than halved, from 3 per cent of GDP to 1.2 per cent.
Public opinion mirrors these numbers. Germans love the western alliance, with almost seven out of ten in favour. But they don’t want to fight for it, as a recent Pew Research Center study found out. Asked whether their country should use force in the event of a Russian attack on an alliance member, almost six out of ten Germans said “no.” Meanwhile, Germans believe by a majority of seven to three that, in extremis, Uncle Sam will come to the aid of Germany. So it is pacifism plus free-riding. Why defend yourself if you can outsource security to the United States?
Germans did not fly along with their Nato allies in Libya in 2011, and Berlin abstained on a UN resolution tightening sanctions on the regime of Muammar Gaddafi. It is almost unimaginable, therefore, that German Typhoons will bomb Islamic State positions in Syria and Iraq. What about Germany’s “near abroad,” the EU? The three-quarters majority in the Bundestag for the third Greek bailout signals continuity in the face of mounting adversity.
Germany has always paid more into the coffers of the EU than any other member—no free-riding here. Regardless of rising anti-euro resentment on the fringes, both left and right, most voters equate the common currency, and the EU as a whole, with the country’s best interests and so grant Merkel and Schäuble a free hand.
Theoretically, he who pays the piper should call the tune. Yet at every tipping point, Berlin has caved in, whatever the tough rhetoric it had used in the run-up. The explanation for this is two-fold. First, there is sheer self-interest on the part of Europe’s largest economy that has profited enormously from the single market. Those who have the cash and the interest always pay more for the collective enterprise—“public goods,” in economic parlance.
The second—psychological—reason why Germany doesn’t grab the power and run with it is the past. Seventy years and two generations after the defeat of the Third Reich, Germans remain allergic to power. It has become as aggressive as a sloth. The cultural transformation is as complete as it is enduring. And Merkel, now in her tenth year as Chancellor, is the perfect embodiment of this amazing conversion.
She runs foreign policy as she runs the country: tentatively, cautiously, judiciously and with an unfailing eye for moods and trends. The exception is the ruthlessness with which she deals with her rivals in the Christian Democratic Party (CDU). None of them, men of ambition and weight, has escaped the axe.
Merkel is the unchallenged leader of the pack and she will run again in 2017. She will trounce Germany’s feeble Social Democratic Party (SPD) and serve until 2021—five more years in office than Thatcher managed.
Those who recall Germany’s terrifying past need not worry about the unbound Gulliver in their midst. A Europe run by committee has lost 12 percentage points of global GDP since 1970. Even with Gulliver in the chair, a committee of 19 (the eurogroup) or 28 (the EU) cannot act with decisiveness. The problem is not that Germany has too much power, but that it has too little.