The Merkelization of Europe

A European Germany has become a German Europe -- and it's all downhill from here.


Not so long ago, France was the political driver and Germany the economic motor of the European Union. "Now," remarked former European Commission president Romani Prodi in February, it is Merkel "that decides and Sarkozy that holds a press conference to explain her decisions." This searing image could be embellished with the 24 EU members cowering in the press room — and Britain now watching through the window.  

Now that Britain has sidelined itself from the historic "fiscal compact" concluded in Brussels on Dec. 9, which provides the EU with new powers to enforce stricter discipline in national budgets, the community appears even more fiercely segregated within its own ranks. Pathetically, the Brits walked not because of the starkly deficient democratic procedure or the fact these governance changes wouldn’t adequately address the euro quagmire, but rather to protect London’s financial services industry from regulations that were part of the deal.  

This isn’t the way European Union was supposed to work, not at all, and Germany’s one-woman show — ostensibly in Europe’s name — could well doom the continent’s beautiful project. Merkel may look like the big winner today, seemingly with Europe at Germany’s feet, but this turn of events could well prove to no country’s detriment more than Germany’s.

"The prospect is of a joyless union of penalties, punishments, disciplines and seething resentments, with the centrist elites who run the EU increasingly under siege from anti-EU populists on the right and left everywhere in Europe," wrote the Guardian‘s Ian Traynor.

Merkel’s short-sighted, audaciously Germany-first reaction to staunch the eurocrisis is the Germanization of European monetary and fiscal policy, foremost the codification of its obsession with tight money, fiscal purity, and budgetary orthodoxy. In spite of all evidence to the contrary, she insists that what’s good for Germany is good for everybody else, too. It’s clearly not. And with the world’s leaders begging her to do "whatever it takes" to stave off global calamity, she’s doing it with Sarkozy at her side and over the heads of the now completely irrelevant European "voters" ("subjects" is the more fitting word). This is a catastrophic mistake, which, politically, vastly expands the EU’s centralized authority while robbing it of even the fig leaf of democratic legitimacy it had sported. Moreover, the economics of Berlin’s Germanocentric prescriptions for the eurozone compound the very problems that landed Europe’s weaker economies in the mess they’re in right now.

Merkel mounts a very high horse when scolding the beleaguered "PIGS" periphery. But her self-righteous fixation with their wasteful ways (which were disastrous, no doubt; imagine if that spending had gone into export-oriented factories or R&D rather than condos or civil servants’ pay) and new sets of sanctions and rules to restrain their supposed genetic profligacy doesn’t offer a long-term solution. There’s not an economist in all of Europe who really believes that dire austerity measures will enable the Greeks, the Irish, or anyone else to pay off their debts.

A few things have to be kept in mind here. For one, it was the one-size-fits-all monetary policy — nearly identical to the Bundesbank’s postwar policies — that helped make the PIGS so uncompetitive and run up those mind-boggling debts in the first place. These policies also  gave the German economy such a lucrative edge on the EU and international markets. After all, while the euro was much harder than the bygone drachma and lira (thus sinking the Club Med’s feeble export industries), it was somewhat softer than the old deutschmark, which enabled Germany to boost exports to the PIGS fourfold and to China by a factor of ten during the euro’s bony decade. As the Belgian editor-in-chief of a leading news weekly Johan Van Overtveldt argues in his new book The End of the Euro: "Before the euro, the German corporate sector had to invest, push productivity, and innovate constantly to compete with companies in countries that regularly devalued their currencies." The unified currency changed that, much to the satisfaction of Germany’s powerful industrial lobby, which still loves the euro for this very reason.

Also, there’s yet another level of German  hypocrisy in its holier-than-thou protestations concerning the poor periphery’s debt. All of Europe is highly indebted and while the European-side of the transatlantic crisis opened on the shores of the Mediterranean, it is now an pan-European crisis — and that includes Germany, one of the first countries to breach the Maastrict debt ceilings. According to I.M.F. numbers, gross government debt in Germany will be nearly 83 percent of gross domestic product by 2012.

The Germans can’t be let off scot-free for what happened. As the Portuguese European MP Ana Gomes recently put it to the Germans: "Our governments, banks, companies and citizens were encouraged to become dangerously indebted by your banks, businesses, your official representatives, and by all who made the euro extremely affordable, at low interest rates, and who encouraged us to procure submarines, cars, equipment and diverse technology we probably did not need. And to buy all of that in Germany, of course." She finished off with a polite but devastating uppercut: "Your budget surpluses, dear German friends, are in fact the mirror image of our deficits."

So rather than try to re-adapt European monetary policy to work a bit better for the traditionally weaker currency countries, the Germans are instead writing into stone the policies best for its economy. It worked for them, so why shouldn’t it work for everyone else? As if economies based on tourism, agriculture, and fishing can hope to win by the same rules that enables the world’s fourth-largest industrial economy to prosper. As George Soros noted: "Germany cannot be blamed for wanting a strong currency and a balanced budget but it can be blamed for imposing its predilection on other countries that have different needs."

One imbecile of a German politician even openly boasted in November, "Now all of Europe speaks German!" a comment that sent the English tabloids into hysterics, for once understandably. German bullying and blunders like this have fueled the eurosceptic fires in Great Britain that underlay Cameron’s subbornness on financial regulation. (In Germany’s defense, Merkel’s stands don’t exude the kind of aggressive nationalism that reeks of the Munich beerhall, as the British tabloids see it, but rather a politics of myopic self-interest for which the next regional election is the long-term perspective.) Anyhow, the Brits have now left the field entirely to the Germans and the French, removing themselves as a possible check to Franco-German hubris. Cameron could have made a principled stand; instead he came away looking the pettiest of them all.

Is there a strategy Merkel has in mind to help get those countries back on their feet again? Simply put: No, and it’s not something most Germans care about either, so convinced are they that the lazy Greeks deserve their terrible fate. (For this Merkel, too, is responsible.) Europe-wide, Keynesian deficit spending is not only frowned upon, it is now being outlawed and subject to sanctions. No one’s talking about investment in the deficit-strapped countries to relaunch growth and employment, or upping wages or other measures in the north that would reduce trade surpluses and give the south a fighting chance. Bloomberg commentator Matthew Lynn in his excellent book Bust: Greece, The Euro, and the Sovereign Debt Crisis puts it nicely: "To the Germans, telling them to weaken their own competitiveness to help out the eurozone makes about as much sense as insisting that Brazil could play in the soccer World Cup only if they had nine men on the field."

The high-deficit countries are being buried in debt, forced to swallow recession-fueling austerity, and pushed down a path of grinding deflation that will take them decades dig themselves out of. How can their domestic industries or exports possibly bounce back when stuck in this trap? Without the levers of a national monetary policy, with which they could devalue a currency, their only option is to slash and slash wages again until Greece is competitive with Germany (and its own population is completely impoverished and rioting on the streets). As it is, the contraction of their economies will send prices and wages plummeting and joblessness skyrocketing. It will make the debt problems even more severe and there’ll be less cash around to repay the balance.

So, what to do if it’s impossible to imagine Europe’s new crown prince budging on the policies best for it and its northern neighbors? One not-so-loopy idea is to create two currency zones — a northern and a southern — the euro for the well-heeled above the Brenner Pass and the "medi" for the western Mediterranean, Central Europe, and maybe Ireland, too. This would have the distinct advantage of preserving the many, indisputable advantages of a currency union, but simultaneously enabling their participants to set money policies and tweak them accordingly in ways more appropriate for their economies. Like the European soccer leagues, under-achievers in the first league could be demoted, while tigers in the lower league could move up.

Another idea along the same lines, but a step further, is "parallel currencies," namely the simultaneous existence of the euro and the whole gambit of national currencies. Both would be legal tender, the euro primarily used, as least at first, as a currency for multinational businesses, the capital markets, and tourists. Eventually, those nations with like-minded economies and policies could adopt the euro as their national money, if they wanted to. But as Lynn underscores "it would happen naturally when the market was ready, rather than being forced on economies that couldn’t cope."

Merkel’s high-handed and domineering "leadership" could prove even more fatal to Europe than the economic fallout of the currency crisis itself. Sarkozy, like Blair during the Bush years, hopes France will carry more clout alongside mighty Germany than estranged from it. But Paris knows the days of the France-German tandem of the postwar decades are over — and that it is now the poodle. The whole idea of the euro in the first place was a French ploy to restrain Germany from dominating Europe. Obviously, it backfired spectacularly.

The German agenda has already transformed the European Union into something very different than the supranational confederation that its founders, including its German founders, envisioned for it — and it can’t work this way, even if the severity of the crisis has forced the rest of the club to fall into line for lack of better options. Germany’s postwar Europhiles, like Helmut Kohl, saw the EU as a fast track to banish the stigma of Auschwitz and Prussia from Germany’s name forever, which would work to its material advantage in a myriad of ways, and indeed it did.

But a "German Europe" (rather than a European Germany) threatens to undo this extraordinarily clever and lucrative strategy, and trigger an anti-Europe reaction that would be in no EU members’ interest.

Angela Merkel can’t dictate pro-German economic policy to the eurozone, to matter how painful its current agony. Robbing Europe’s national parliaments of decision-making powers without popular votes on it is arrogant and authoritarian, and it will create a backlash that could well crash the best idea the Europeans ever made work. But at least now Henry Kissinger has the single telephone number he has long wanted for Europe. It is 49-30-40002526 — Chancellor Merkel’s office.

Paul Hockenos is a Berlin-based journalist. His recent book is Berlin Calling: A Story of Anarchy, Music, the Wall and the Birth of the New Berlin (The New Press).

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