Assertive Germany now vital if euro debacle to be resolved

 

ANALYSIS:The euro as it was created has failed. What happens next is up to Germany, writes DAN O'BRIEN

WHAT DOES Germany want? The German question has rarely been anything other than a central strategic concern for Europe since that state’s founding in the 19th century upset the Continent’s balance of power.

It is again centre stage as the future of the euro hangs in the balance. Ultimately, Germany will have to decide whether to take on a greater role in Europe’s affairs and save the euro, or to turn in on itself and let the currency fail.

The reasons for Germany’s central role in European affairs are many. Demographically, it is second only to Russia in population size. Economically, it is second to none, and has enjoyed that status since it overtook Britain more than a century ago. Geographically it is at the Continent’s crossroads and shares land borders with nine countries, more than any other. Militarily, in its first 70 years of existence it went to war against almost all its neighbours, often simultaneously, and always with devastating consequences.

German aggression in the 1914-45 period caused distrust and suspicions which linger to this day. After the second World War, despite Germany having been ravaged by the conflict, carved in half and tightly contained by the superpowers, the fear that it would again rise up remained. “To keep the Americans in, the Russians out and the Germans down,” was the oft-repeated multiple rationale for the establishment of the North Atlantic Treaty Organisation (Nato).

Even Germans did not trust themselves. Novelist Thomas Mann described the Continent’s choice: “A European Germany or a German Europe.” In other words, embrace us or we will dominate you. Everyone preferred the former option, and Europe’s integration projection was launched.

But time only partially dimmed suspicions. In the late 1980s when the prospect of reunification arose, fears quickly resurfaced. And this despite almost a half century of peace in Europe and studied German unassertiveness over that period.

The then British prime minister, Margaret Thatcher, believed aggressive expansionism by Germany was inevitable. She attempted to block reunification. Her French counterpart, Francois Mitterrand, was no less concerned. But he realised reunification could not be stopped. France’s strategic answer to a greater Germany was a more integrated Europe: the euro in return for reunification. And so it happened.

But the euro as it was then designed has failed. Its architects did not construct it to withstand an earthquake in the financial system of the magnitude that has been experienced. The edifice as it exists will have to be redesigned and strengthened or it will come down. What Germany decides to do, as the largest, strongest and most fiscally capable economy, will determine the outcome.

Given the enormity and seriousness of the developments in the euro zone, the speed with which they have taken place and the uncertainty for the future that they continue to generate, old concerns about German intentions have resurfaced. Most crudely, this has been evident, here and elsewhere, in talk of a German takeover of Europe and even a “Fourth Reich”. Such views are informed by comic books, not an understanding of national character, such as it is, or of German actions in the world after (and before) the 1914-1945 period.

Countries are not like people. They do not have immutable characteristics, but change and evolve constantly. There is nothing inherently aggressive and dominating about Germany or in the German people. To say so is as stupid as saying, for instance, that the Irish have always been and will always be feckless drunks.

Europe and the world have changed fundamentally since the middle of the last century. So has Germany. Its actions in the post-war era show how it went from extreme aggression to unusual restraint. It followed America’s lead in security affairs and France’s in European affairs. It bankrolled the EU and supported that entity’s institutions when other big countries were inclined to ride roughshod.

But such restraint in the post-war decades could be attributed to tactical manoeuvring, in an effort to seek rehabilitation, rather than a deeper underlying change. Some feared that once enough time had passed, Germany would revert to type.

As the Cold War ended, Thatcher and Mitterrand were not alone in believing a greater Germany, no longer constrained by two superpowers, would act much more assertively on the international stage. But more than two decades on, it is the meekest of the big countries and there is little evidence it has abused its power. There is much more evidence that it is unwilling and unable to adapt to the responsibilities that come with its position of great influence.

For years, Britain and France have been dragging it to join them in ratcheting up sanctions on Iran in an effort to thwart the Islamic state’s bid to acquire a nuclear weapons capability.

On energy security, Germany is best placed to forge a common European position vis-a-vis Russia. Instead, it undermined its own position by cutting a short-sighted deal with the energy superpower to build a pipeline under the Baltic, bypassing its eastern EU neighbours.

Earlier this year, when the rest of Europe realised that aiding anti-Gadafy forces in Libya was in everyone’s interests, Germany had no stomach for involvement. It amazed its EU and Nato allies when it did not vote with them on the UN security council resolution permitting intervention.

This same narrow vision has been in evidence since the outbreak of the international financial crisis three years ago and its European manifestation 18 months later. After the collapse of Lehman Brothers in 2008, the then German finance minister crowed it was a purely a US problem, despite the huge exposure of German banks to toxic US assets. Since then, at national and European levels, few would accuse Germany of being proportionately proactive about stress testing banks so worries about their soundness could be calmed.

On the euro sovereign debt crisis there is near universal agreement among observers that the German government has persistently done too little, too late at European level, and failed to make the case domestically of the huge benefits the euro has brought to Germans.

Germany has also hindered the European Central Bank from doing more to address the crisis. While central banks elsewhere judge bond-buying to be a risk worth taking, German policy makers want to adhere rigidly to orthodoxy. They overstate the inflationary risks of such action hugely and understate, to an even greater extent, the dangers of inaction (to be concerned about runaway inflation at the current juncture is akin to worrying about being struck by lightning at the same time as being caught up in an earthquake and at risk of being crushed by falling masonry).

The time for dithering and half measures is rapidly coming to an end. Decision time on the euro is fast approaching. Does Germany really want to save the single currency?

The country’s politicians and policy makers know the economic implications alone for Germany of a euro collapse would be huge, and last into the medium term at least. But they also know that entering full fiscal union – the only way to save the single currency – has enormous consequences over the longest term. It would require costly, permanent, deep and intrusive engagement with other member countries.

This fills Germans with dread. Far from wanting to tell everyone else what to do, the prospect of forever persuading, pleading, pushing and threatening other countries to manage their economic affairs more prudently is a nightmarish responsibility that Germans don’t want.

Germany could decide that a finite period of economic meltdown is more tolerable than forever attempting to make everyone else more Germanic in how they manage their economies, and permanently bailing them out if they fail.

The real risk for Europe now is not German domination, but isolationism.


Dan O’Brien is Economics Editor

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