Is Europe’s Problem German Strength or Weakness?

By Roland Bensted

The election in March 2012 of Joachim Gauck as Germany’s President demonstrates a remarkable achievement of recent German history. For the first time since unification in October 1990, Germany has a Chancellor and President from the former East Germany. Widely admired both for the size of its export oriented economy, Europe’s largest, and for its more enlightened way of doing capitalism, Germany had the capability and the necessary goodwill before the start of the Eurozone crisis to take a positive leadership role during the downturn. Its voice within the EU is very strong, as it has been since the EU’s inception. Yet Germany has squandered these advantages.

It has actively resisted taking coherent action that might help to resolve Europe’s problems, even when the OECD has called for a bigger bailout fund. German political leaders have instead surrendered to domestic political concerns. For such a powerful global actor to take this course of action demonstrates considerable weakness.

Germany has pursued a policy course that is strongly focused on imposing balanced budgets on Eurozone members, and obsessed with maintaining low inflation. One could perhaps reasonably argue that a tough stance on fiscal policy when deficits and debt abound would be merited, so long as the outcomes of such a policy could accurately be said to be fair. Yet the imposed penury and masochistic fixation with balanced budgets and low inflation rates are neither fair nor achievable. This blinkered focus has led to poor policy, and poor policy in turn has serious consequences like unemployment, poverty, and loss of social cohesion, with millions of Europeans at the sharp end. Meanwhile, there is little sign of growth across the continent.

Germany’s abysmal failure to lead or endorse anything approaching a sustainable solution to the Eurozone’s many challenges is in large part a result of cynical short term political calculation and cowardice. That Germany has benefited substantially from being part of the Euro is repeatedly understated or even ignored by German politicians and media keen to secure domestic political capital from being seen to be tough on the more profligate countries of southern Europe. Yet Germany itself benefited during the boom years from running budget deficits. And Germany has received a large boost from the Euro. As commentators such as Will Hutton correctly observe, Germany has gained hugely from having the same exchange rate as less competitive exporters such as Greece and Spain. Membership of the Euro has helped Germany to increase its share of world trade in the past ten years while the trend for most other developed states has been in the opposite direction. It stands near the top of the WTO’s tables of biggest exporters alongside China and the US, countries that have far larger populations that Germany’s 82 million.

The key point here is that recent policy choices Germany has made are not inevitable. There are alternatives. After all, the role of politicians is to assess the best choices given the circumstances and then take what they consider to be the most appropriate actions. In the EU and Eurozone case - and Germany’s has been a dominant voice within Europe - politicians have too often made the wrong choices for the wrong reasons. If Germany had taken different decisions, circumstances in turn could be very different. Yet it has continued to defy the notion that those with greater power have greater responsibility by sticking to targets that are impossible for others to meet.

The revelation that even the fiscally conservative Netherlands would not be able to meet its side of the bargain under self- defeating Eurozone measures on budget deficits serves to further illustrate that the policy is unworkable. It simply cannot succeed. Germany is indicted on this issue.

Meanwhile, a decline in credit lending to consumers and businesses across Europe and higher rates on existing lending such as mortgages, which puts more people at risk of default, continues to be a significant problem for the continent.

And yet Germany remains committed to actions that can be described, at best, as piecemeal and, at worst, dangerous. From a cursory glance at 20th century history, it is clear why Germany’s authorities and many of the German people have a strong aversion to inflation and debt. Whether German guilt about its past is a reason for the country’s current inaction, as some commentators have claimed, is very contentious. Yet, whether this is true or not, there should be no excuse for policies that are causing needless suffering in the present.

The measures announced following a meeting of European finance ministers on 30-31 March inspire little confidence that a lasting solution can be achieved soon, especially when the US, G20 and IMF have joined the OECD in calling for a larger bailout fund. As the Financial Times’ Wolfgang Münchau has noted, Germany continues to resist a full merger between the European Financial Stability Facility and its permanent successor, the European Stability Mechanism.  

In the current circumstances, where further European integration is required, Germany’s position is prolonging the crisis by refusing the follow an integrationist route. It is not that Angela Merkel, or Germany’s hawkish constitutional court, wish ill on the rest of Europe. It is simply that that Germany’s blinkered position, while at least partially understandable, is both ineffective and counterproductive. This position, however, seems likely to face a greater challenge following the election of the Socialist Party’s François Hollande as President of France on 6 May, and parliamentary elections in Greece on the same day. If, as seems likely, President Hollande uses an upcoming EU summit to emphasise "growth, responsibility and governance" instead of austerity and balanced budgets, German leaders may at least have to compromise.

The knowledge that things could be so different makes Germany’s actions all the more exasperating. It is rightfully an influential and widely admired actor. From its successful export-focused economic model - the type of which the likes of the UK and US can only dream about - to its successful democracy and remarkably peaceful unification, Germany has much to be proud of in its recent history.

Yet for such an actor to shirk from its responsibilities underscores that it is German weakness, not strengt, that is a problem for Europe at the present time. 


9 May 2012