Articles:
Can Germany lead at last?

Originally published by Politico 

There’s only one country that can get Europe out of this mess. But Berlin is balking.

Europe—and indeed the world—is about to learn the answer to a crucial question: What does Germany want from the European Union, and what is it prepared to give in order to get it? This is, or should be, Germany’s moment. The question is whether it is willing and able to seize it.

            To do so, Germany is going to need to show not only leadership but also flexibility and creativity. It will need to show that it recognizes that the European Union’s prosperity and stability is central to its own national interest. The prompt for this is of course Greece, and its virtually certain exit from the euro. Having failed to save Greece, the task now is to save the euro as well as the cause of European unity that it is supposed to represent.

Above all, Germany may need to finally transcend its inward-focused national character. The late historian of Europe, Tony Judt, in his book “Postwar,” quoted the great 19^th century German poet, Heinrich Heine, as a way to cast doubt on Germany’s capacity for pro-European vision. Heine wrote that while French patriotism was typically outward-looking, “A German’s patriotism means that his heart contracts, and shrinks like leather in the cold, and a German then hates everything foreign, no longer wants to be a citizen of the world, a European, but only a provincial German.”.

This sentiment may seem familiar to many 21^st century Europeans as well. During the five years since the sovereign debt crisis erupted in 2010, mainly among the southern European members of the euro, the answers detected by most fellow Europeans to the two parts of the German question—what does Germany expect from the EU and what will it give up to get it?—have been “obedience to the rules and policies that Germany sets” and “as little as possible.” The imminent departure of Greece from the euro raises the chance—actually, the hope— that the answers could be about to change.

The answers certainly need to. During the euro crisis, the paradox has been that Germany, and German ideas, have become truly dominant in Europe for the first time since 1945, yet Germany’s government has remained reluctant to draw the logical conclusion and actually show leadership.

Now Germany needs to grow into its new role. The economic performance of the 19 euro members remains so poor that it is posing a political danger to the future of the European Union itself. The danger comes not from sovereign debts or the financial markets but from the rise of populist, nationalist political parties preaching the rejection of the euro, and even of the EU itself.

Greece, which represents barely 1.8 percent of euro area GDP, is not the reason, and nor is economic contagion from so-called Grexit. Seven years since the collapse of Lehman Brothers, unemployment in the United States has fallen to 8.3 million people out of a population of 320 million; in the euro area, it remains more than twice as high at 17.7 million, in a population of similar size, at 335 million in all.

A modest economic recovery is eroding that unemployment total in Europe, but only slowly.  The German line, supported by the European Commission and by some other northern European creditor nations, has been that countries must be patient: they must reform their economies while following a very tight fiscal policy. Eventually, this will pay off.

But politics is moving faster than economics, as insurgent nationalist parties rise in the opinion polls in France, Italy, Spain, Ireland and many others, even in Scandinavia. The electoral success of Greece’s Syriza in January, and now its victory in Greece’s referendum last Sunday, have emboldened parties such as France’s Front National led by Marine Le Pen, Italy’s two anti-euro opposition groups, the Five Star Movement of Beppe Grillo and the Northern League of Matteo Salvini, Spain’s leftist Podemos, and Ireland’s Sinn Fein.

The true contagion from Grexit risks being political, not economic. Elections due in Spain later this year and France in 2017 represent the greatest danger of that contagion undermining the foundations of the euro and of the EU, as does the referendum on continued membership of the EU by a non-euro member, Britain, due in 2016 or 2017.

Discontent about jobs and living standards in the euro area is being reinforced by fear and anger about immigration, especially the flow across the Mediterranean of tens of thousands of people from North Africa and the Middle East. Italy, the country most directly affected by the smuggling of migrants across the narrow sea from Libya, wants a European Union solution to this crisis, including the interception of smugglers’ boats near enough to Libyan waters to be able to send them back safely.

But this is being blocked by northern European countries, notably by Germany, whose Bundestag parliament insists on a United Nations resolution before such interception can take place. Germany has accepted more asylum-seekers than any other EU country in recent years. Yet its response to the migrants’ crisis is typical, in many ways, of its wider EU posture: It is prepared to be generous and humanitarian, but wants to cling to rules and is unwilling to offer any bolder leadership. Solidarity, which is supposedly the core value of the European Union, is in shorter and shorter supply.

Now, in the coming days and weeks, the German posture is about to be tested, at least in economic policy, because Grexit offers both the chance, and the need, to change.

It offers the chance of change because Greece has been such a hard, exceptional case. Over the past five years, the Greek people have suffered a painful recession, arguably the most painful suffered by any developed economy since 1945: a drop in GDP of more than a quarter, with correspondingly large cuts in wages and public pensions. But despite following their creditors’ demands in that way, Greeks’ twin problems only got larger: their public debt has increased in proportion to GDP, while the mistrust felt about them in Germany and other creditor countries has grown.

That mistrust has been deepened by the Syriza government since January, led by Alexis Tsipras, who is youthful and charismatic but who has essentially done nothing in the past six months to solve any of Greece’s underlying problems.

One remarkable feature of Tsipras’s efforts to negotiate with the other euro members and with the International Monetary Fund over its debts and future bailout loans has been his failure to gain support from other countries. Euro members poorer than Greece, such as Slovakia and the Baltic States, have opposed any special treatment for the Greeks. France and Italy, which initially looked friendly to Tsipras, swiftly turned against him. And crucially, German public opinion has become even less sympathetic to Greece than before.

So with Grexit the exception will be gone. The country that in the first decade of the 21^st century lied about its true budget deficit and true debts, and then, despite all that suffering, failed to clamp down effectively on tax evasion or to sell off its inefficient, often corrupt, state enterprises, will no longer be the focus of euro policy-makers’ attention.

The euro zone’s economic under-performance will, however, still be there. So will be the populist, nationalist political parties in other euro countries, campaigning against the single currency, globalization and immigration. Which brings us back to the German Question.

Germany has been the big winner from the introduction of the euro, a currency which has been much cheaper on international exchanges than the old Deutschemark would have been, and so which has helped Germany’s exports to boom. In 1999 when the euro was launched, Germany was running a small deficit on the current account of its balance of payments. Now it is running one of the world’s biggest surpluses, equal to more than 6.5 percent of GDP. That is more than five times larger than China’s once-notorious balance of payments surplus.

Throughout the euro crisis, German policy-makers, led by the conservative finance minister Wolfgang Schaueble, have taken an austere, some would say hair-shirt line. Germany’s surplus, and the deficits and debts of other euro countries, especially in southern Europe, have been all about competitiveness, they have said. Debtor countries need to tighten their fiscal belts and get economically fitter. Creditor countries cannot, must not, help by fiscal expansion to boost their demand. They too must balance their budgets and reduce their own government debts.

As a way to keep debtor governments’ feet to the fire of reform, this has made some sense. The big failure of the euro since its launch 16 years ago has not so much been the debt crisis as the fact that in its first decade it relaxed rather than increased the pressure on countries to liberalize their markets, by virtue of the fact that borrowing costs fell throughout the currency area nearly to German levels. Hence the property bubbles in Ireland and Spain, the public debt boom in Greece, and the ease with which both governments in France and Italy avoided the need to make politically painful reforms.

Such reforms remain vital. But the euro area’s poor economic performance is making them harder rather than easier, emboldening political opposition to liberalization. And that economic performance cannot be detached from the austere fiscal policy Germany has insisted upon throughout the euro area, not just in the debtor countries. There are many reasons for the huge gap between American progress since 2008 and that in Europe, but fiscal policy ranks high among them. In Britain too, outside the euro area, fiscal policy has been helpful for economic recovery, despite rhetoric sometimes to the contrary from its own government.

For the sake of the survival of the euro, this now needs to change. Alongside co-ordinated liberalization of markets and economies, a Europe-wide program of public investment, especially in infrastructure, would do a lot to kick-start growth, create jobs and rekindle hope.

Germany too needs better, modernized infrastructure. But it is reluctant to change its line on the euro-area’s fiscal rules for fear of letting recalcitrant reformers off the hook, notably in France. And, with its own jobless rate one of the continent’s lowest, it argues that being at full employment it has no real scope for reflationary spending.

The question now, once the euro has been rocked by the departure of Greece, is whether the Germans mean what they have been saying—or whether they might just have stuck to it because of the Greek saga, and in the absence of any broader crisis to force them and their politicians to risk a change.

To change to a more reflationary stance would be an act of generosity for Europe. It is genuinely not necessary for Germany’s domestic economy. But some form of collective boost is necessary for the euro area, and arguably for the EU as a whole.

If Germany were now to lead such a change, tying it perhaps to a renewed single-market liberalization program and the creation of a genuine energy union, connecting together electricity grids and gas pipelines throughout the EU, it would be an act of far-sightedness. It would represent a recognition that one of Germany’s vital national interests is a true, unifying recovery in the European economy, one that defeats the populists.

The trouble is that leadership in Europe is not something Germany feels comfortable with, and, secondly, it is something that German public opinion has become less inclined to support, thanks to the euro debt crisis. Ever since 1945, the Germans have felt they ought best to be followers in Europe rather than leaders, though thanks to their economic might from the 1970s onwards they have arguably been the original “leaders from behind,” to borrow President Barack Obama’s phrase about his own foreign policy.

In the current crisis mistrust of Greece, and the resentment of German taxpayers at the thought of bailing out others, have been big reasons for this posture. Much of that resentment has been somewhat misplaced, since European bailout money has in truth been used to bail out the banks that lent billions to Greece in the first place, pre-eminent among them the German banks. But in politics, perceptions count more than technical realities.

With Grexit, the euro boat is about not just to be rocked but potentially to be holed near the waterline. So to stop the boat from sinking, as political parties all over Europe draw the conclusion that withdrawal from the euro is possible after all, and financial markets resume their speculation about who might be next to go, will require just the sort of leadership that Germany has been reluctant to give.

Will it do so now? Or was Heinrich Heine perhaps correct after all about the German character? We are about to find out.