Europe´s confusion about German leadership

20.07.15 Publication:

We are in an interval during the long Greek tragedy, in agap between the wailings of the chorus but still far from the end, so this is a
good moment  to ponder one important point
about the politics of the euro zone: why do the other 18 euro zone members
accept Germany’s leadership when it is wrong and yet refuse it when it is
right? Or to put it another way: if this is a German-dominated Europe, why are
the Germans so ineffective at domination?

Of course, this all depends on what you think is right and
wrong. What I mean by “right” is the view expressed by Wolfgang Schaueble,
Germany’s finance minister, that Greece should leave the euro, both for its own
sake and that of the single currency itself. And even if you don’t think it is
right, it is certainly logical.

The logic of Grexit—whether it is “temporary” or not is mere
semantics—comes from the combination of the International Monetary Fund’s
analysis of Greece’s sovereign debt burden, which defines it as unsustainable without
a big write-off, and the view presented by euro zone countries big and small,
rich and poor, which holds that forgiveness of debt by official creditors is
incompatible with Eurozone membership.

There is room to argue about whether that last point, that
only a leaver can have its debts written off by other governments and official
lenders, is necessarily true. But none of those arguing strongly for Greece to
be kept in the euro—including France, Italy and Luxembourg, the most vociferous
in opposition to the Schaeuble line—have addressed that question, at least not
publicly. Until they do, simple logic and the arithmetic of debt will make
Grexit simply a matter of time.

Having entered the weekend of negotiations of July 11/12
expecting to force Greece out of the euro, neither Chancellor Angela Merkel nor
Mr Schaeuble can now think that Germany in any sense “dominates” Europe. And
yet they have been successful for more than three years now in holding the euro
zone to an economic stance that has left the 19 countries’ level of
unemployment more than twice as high as that of America.

It is hard to find a better definition of “wrong” than the fiscal
pact of 2012, which mandates a universally tight fiscal stance in the euro
zone, regardless of whether a country has an affordable level of public debt,
regardless of the cost of borrowing and regardless of the state of aggregate
demand, and which simultaneously rejects any idea that countries with large
current-account surpluses bear any responsibility for adjustment.

This is, in other words, a policy under whose logic America must
be seen as having been fiscally reckless in recent years, with its gross public
debt exceeding 102% of GDP,  and which is
shown by its current-account deficit of 2.6% of GDP to be suffering a severe
lack of competitiveness that evidently requires urgent structural reform and
fiscal austerity. The fact that the unemployment rate in America of 5.3% is
even lower than Germany’s 6.4% is a trifle inconvenient for this argument, but,
well, perhaps it is just storing up trouble for the future.

It is this strange combination, of a right policy that is
rejected and a wrong policy that is unchallenged, that is giving rise to the
risk talked of by the Polish president of the European Council of political
contagion from Greece, breeding nationalism all across Europe.  Such nationalism, in the form of France’s
Front National, or Italy’s Lega Nord, or even Britain’s UK Independence Party,
is not characterised chiefly by anti-German feeling, which it might be if
Germany were truly dominating Europe. It is characterised by a rebellion
against the mainstream parties in each country which have colluded with this
bizarre situation.

This very combination offers, however, a way forward.
Germany can be given its way on Grexit, in exchange for altering its attitude
to the fiscal rules that are throttling the European economy. The funny thing
is, this is what the IMF has been arguing for for several years, at least in
its economic analysis. One day, it might even be listened to.