Germany would have much to lose from euro zone failure

World View: The German hegemony argument tends to overlook how much ground Berlin has already conceded

German chancellor Angela Merkel and Italian prime minister Enrico Letta on a balcony at the Chancellery in Berlin earlier this week. Photograph: Jesco Denzel/Reuters

German chancellor Angela Merkel and Italian prime minister Enrico Letta on a balcony at the Chancellery in Berlin earlier this week. Photograph: Jesco Denzel/Reuters


Some ideas are almost too seductive to examine closely. One such theory concerns the emergence of a new German hegemony in the euro zone crisis.

The last turbulent years have catalysed a pre-existing historic transformation in Europe, the argument goes, allowing austerity-obsessed Berlin push too much too soon on crisis-hit neighbours.

Although biting reforms have failed to generate the positive economic results German supply-side economic ideology predicts, the critics say Berlin has prescribed even more austerity medicine and risks killing the patient.

Selfish giant?
The idea has taken root of a German hegemony, a selfish giant imposing its own economic model on others to defend its own national and economic interests, with blithe disregard for the social consequences elsewhere. Behind some of the more vociferous versions of this argument is the view that, historically, domination is what Germany does best: why should we be surprised now?

There is little doubt that Germany is exerting greater power on the European stage than in the past. The fast-moving crisis has seen the rise of crisis summitry and late-night deals at inter-governmental level where the size of population and economy have a more direct influence on decision-making than was the case in the EU’s traditional, if slower, commission-led decision-making process.

But is current German influence part of a long-term strategy to dictate the internal politics and social character of other EU states or a short-term opportunity? An imperial play or an economic and political accident?

Taking the long view it’s worth considering that, if today’s Germany was still the economic basket case of a decade ago, it is likely things would be very different. Germany’s current economic strength carries no guarantees for the future, particularly considering its ticking demographic time bomb.

If Berlin has a greater say in today’s euro zone, it also has the most to lose from its failure. German officials have already conceded as much, telling their EU partners early on that they will do whatever it takes to save the euro.

Showing your hand, in politics as in cards, weakens your position. And so Germany makes demands as events move to their endgame: a Berlin-backed euro zone 2.0 with common fiscal rules, central oversight of financial institutions and a bailout fund ready to head off future crises.

The German hegemony argument tends to overlook how much ground Berlin has already conceded. Initial Berlin resistance to bailouts gave way to conditional aid and then agreement to break the link between sovereign and private debt and to allowing bank recapitalisations from the ESM bailout fund.

As with each previous concession, the bank recapitalisation deal was festooned with conditions. But a concession to mutual liability in Europe is a long way from the euro zone German politicians told their voters they were joining.

Consider, too, the ECB: set up in the likeness of the Bundesbank, it has, in the crisis, shed its fiscal hawk feathers and become a very different, bond-buying bird. ECB interest rates are as ill-suited to Germany as they are to crisis-hit neighbours, Angela Merkel admitted last week, if for opposite reasons.

The idea of German hegemony overlooks how Berlin enjoys varying levels of support in the crisis from Finland, the Netherlands and Austria. Regular backing has come, too, from Sweden, Poland and Denmark -- admittedly none of which are euro zone members.

Merkel said last week that thoughts of a German hegemony are “alien” to her.

Demanding budget consolidation and economic reform are, she argued, her political insurance for selling to German taxpayers the idea of bankrolling loans and guarantees to what could otherwise be economic black holes. The lesson of the euro crisis, she argues, is that countries sharing a currency have to accept allowing Europe the last word in more areas than was previously considered desirable.

Her officials dispute that this new Europe is a German-style austerity experiment. No states are being asked to cease borrowing, they argue, just to learn to borrow less. This, they suggest, is the way to sustainable euro zone economies that are less vulnerable to unaccountable bodies like ratings agencies.

Mutual liability
If there is a tension, it is that Germany and its allies appear more worried about Europe’s tomorrow while Berlin’s critics are worried about Europe’s many problems today. The challenge is how to create a political and economic synthesis that pleases both sides.

Berlin officials know that the window for austerity may be closing. Far from hegemonic ambitions, their crisis ambition has been to secure as much sugar as possible to coat the bitter pill of mutual liability German voters will eventually have to swallow to preserve the euro zone.

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