European Germany or Germany's Europe

Hugo Drochon, Project Syndicate 9/9/16

The UK’s vote in June to leave the European Union not only changed the 

course of British history, but also underscored fundamental questions 

about Germany’s role in Europe and the world. With the migration crisis 

weakening German Chancellor Angela Merkel politically just when her 

authority in Europe is most needed, the new “German Question” can no 

longer be avoided.

CAMBRIDGE – Even before voters in the United Kingdom decided in June to 

“Brexit” the European Union, notes Anatole Kaletsky of Gavekal 

Dragonomics, German Chancellor Angela Merkel was widely credited with 

“finally answering Henry Kissinger’s famous question about the Western 

alliance: ‘What is the phone number for Europe?’”

Brexit merely confirmed the point: UK Prime Minister Theresa May’s first 

foreign trip after replacing David Cameron in July was to Berlin. If 

Merkel has the power to mold the relationship between the EU and the UK, 

as May appears to believe, she also has the power to shape the 

post-Brexit EU.

The question is what type of Europe Germany wants. For Princeton 

University’s Harold James, “Brexit means Germany can no longer rely on 

its liberal, more market-oriented ally around the discussion table.” But 

Kaletsky wonders whether Germany wants to discuss much of anything at 

all. “If Europe’s phone number has a German dialing code,” he quips, “it 

goes through to an automated answer: ‘Nein zu Allem.’”

But Europe can no longer afford what Kaletsky describes as “the standard 

German response to all economic initiatives aimed at strengthening 

Europe.” As many Project Syndicate commentators point out, Europe’s 

global influence depends on further integration. And that is impossible 

without determined German leadership, which may now be hard to find. 

Indeed, with “public support for the government…” having “fallen below 

50%,” Michael Br?ning of the Friedrich-Ebert-Stiftung wonders if Merkel 

will even seek “reelection as her party’s candidate for another term.”

Europe’s Civilizing Mission

To understand what almost unchallenged German leadership in Europe could 

mean for the EU and the world requires a sober grasp of how Germans 

themselves view Europe and their role in it. And many Germans have come 

to consider the EU a burden, not a benefit; the other member states, 

they increasingly believe, want to squeeze ever more money out of them.

But the truth is that Germany has been one of the biggest winner over 

the past seven decades of European unification, both economically and 

politically. As Joschka Fischer, a former German foreign minister, put 

it in 2015, Germany restored its reputation after World War II by 

“embracing Western integration and Europeanization.” Because “Bismarck’s 

unification of Germany [occurred] in the nineteenth century,” he 

explains, “power became inextricably associated with nationalism and 

militarism.”

What Fischer calls “the foundation of the second, unified German 

nation-state in 1989” reflected and reinforced a very different mindset. 

For Anne-Marie Slaughter, President of New America and a former director 

of policy planning at the US State Department, today’s Germany accepts 

that increased power will require it to assume “greater responsibility 

to defend and extend” the international order from which it has 

benefited so greatly. She quotes German President Joachim Gauck: the 

post-World War II order gave rise to the “good Germany, the best we have 

ever known.”

Yet Fischer fears that the lessons of European integration are being 

lost in the avalanche of crises that has hit the EU, with the Greek debt 

crisis catalyzing German disillusionment. In the fraught negotiations at 

the height of the crisis, he says, Germany “announced its desire to 

transform the eurozone from a European project into a kind of sphere of 

influence.” Germany no longer wanted “more Europe; it wanted less.”

Of course, the contrast between a “European Germany” and a “German 

Europe” is not new. In 2013, after Merkel was reelected, James noted 

that “independent German political units” have been disappearing ever 

since the 1648 Treaty of Westphalia. “If Germany’s new government leads 

the charge toward a stronger, more federal Europe,” he suggested, “a 

century from now, there may well be no sovereign German political unit 

at all. Germany and its lovers die in the end, only to live happily ever 

after.”

Perhaps. In the meantime, Brexit, together with Merkel’s decision to 

admit more than a million migrants from Syria and elsewhere in the 

greater Middle East (partly to repair the reputational damage Germany 

suffered as a result of its stance toward Greece), has made Germany’s 

choice both clearer and more urgent. Germany can either regard Europe as 

a projection of German power politics, as it did in the first half of 

the twentieth century, or it can fulfill the post-1945 goal of 

self-dissolution into a truly European federal entity.

The Arrogance of Reform

Immediate political factors aside, the question of Germany’s role in 

Europe stems from its economic dominance. During the eurozone crisis, 

many decried Germany’s current-account surplus, not Greek profligacy, as 

the true cause of the Union’s problems. But, as Harvard’s Kenneth Rogoff 

argues, “Germans view the maintenance of strong balance sheets as 

essential to their country’s stabilizing role in Europe.” Take one away, 

and you may be left without the other.

Ironically, as Daniel Gros, Director of the Brussels-based Centre for 

European Policy Studies, reminds us, at the start of the century, it was 

Germany that was the sick man of Europe. “Its economy was mired in 

recession, while the rest of Europe was recovering; its unemployment 

rate was higher than the eurozone average; it was violating the European 

budget rules by running excessive deficits; and its financial system was 

in crisis.” Through austerity and structural reforms, Germany 

transformed itself.

Little wonder, then, that Germans counsel others to follow their 

example. But, as Gros points out, this story is only half right. After 

all, Germany has gained little in terms of productivity. Marcel 

Fratzscher, formerly of the European Central Bank, together with Jürgen 

Fitschen of Deutsche Bank and Reiner Hoffmann of the Confederation of 

German Trade Unions, assert that a “key reason for this lackluster 

performance is Germany’s notoriously paltry investment rate, which is 

among the lowest in the OECD.” They note that, “since 1999, the largest 

German multinationals have doubled their employee headcounts abroad, 

while cutting jobs at home.”

The euro’s introduction certainly helped Germany regain some 

competitiveness, but Gros points to an often-overlooked factor: 

“persistently high unemployment forced workers to accept lower wages and 

longer working hours, while wages continued to increase by 2-3% per year 

in the eurozone’s booming peripheral countries.” German gains in 

competitiveness, then, are relative, and subsequently Germany has 

obliged Spain and Greece – but not Italy – to undertake reforms much 

harsher than those it ever imposed on itself.

Many economists now urge Germany to boost wages and demand to help 

exporters in Greece and other countries on the eurozone periphery. 

German firms might complain, but Dalia Marin, Chair of International 

Economics at the University of Munich, thinks that the “most important 

factor behind Germany’s success” is not price competitiveness, but 

quality. Because “German exporters are organized in a way that is less 

hierarchical and more decentralized than other European firms,” she 

argues, “employees at lower levels of the corporate hierarchy” can 

“devise and implement new ideas.” And, because “these employees are 

often closer to customers than those higher up, their collective 

knowledge about what the market is demanding is an important source of 

value.”

But it is unclear that periphery countries would benefit from higher 

German demand. As Gros argued in 2013, Germany is “just the tip of a 

Teutonic iceberg.” Beneath the surface, “the Netherlands, Switzerland, 

Sweden, and Norway are all running surpluses that are larger as a 

proportion of GDP.” Given that Germany imports relatively little from 

the eurozone periphery, higher German demand would mainly benefit 

countries that already have large external surpluses.

Does this mean that the German growth model should be ignored – in 

Europe and elsewhere? Harvard’s Dani Rodrik notes that countries such as 

India and Turkey (as well as many in Africa and in the former Soviet 

bloc) have proved that growth can also be debt-led. And, as Gros points 

out, the “Teutonic” surplus is currently balanced by “Anglo-Saxon” 

dissaving: “Together, the sum of the current-account deficits of the 

United States, the United Kingdom, and major Commonwealth countries 

amounts to more than $800 billion, or roughly 60% of the global total of 

all external deficits.” This helps to explain Merkel’s eagerness to 

maintain a close trading partnership with the UK.

The Ordoliberal Straitjacket

The University of California at Berkeley’s Barry Eichengreen traces 

Germany’s deep-seated “ideological aversion to budget deficits” to “the 

post-World War II doctrine of ‘ordoliberalism,’” championed most 

effectively by Ludwig Erhard as German finance minister in the 1950s and 

Chancellor in the mid-1960s. According to Eichengreen, ordoliberalism, 

which “counseled that government should enforce contracts and ensure 

adequate competition but otherwise avoid interfering in the economy,” 

succeeded in preventing “German policymakers from being tempted by 

excesses like those of Hitler and Stalin.” And yet its “emphasis on 

personal responsibility” ruled out “the idea that actions that are 

individually responsible do not automatically produce desirable 

aggregate outcomes.” As a result, “it rendered Germans allergic to 

macroeconomics.”

But, as James points out, ordoliberalism was a response to Germany’s 

need for “a complete change of its domestic regime to break out of its 

cycle of debt and default.” That experience, he argues, informs 

Germany’s approach to the eurozone in general, and to its highly 

indebted member countries in particular: “without a fundamental 

reorientation of a country’s politics, the thinking in Germany goes, 

debt forgiveness will always remain a futile exercise.”

Jürgen Jeske, a former publisher of the newspaper Frankfurter Allgemeine 

Zeitung, questions the sincerity of that thinking. Germany’s “current 

economic dominance,” Jeske argues, “has been built on a policy framework 

that stands in direct opposition to” Erhard’s doctrine, which he 

adamantly defends. The truth, according to Jeske, is that Merkel’s 

government has abandoned ordoliberalism in favor of an economic strategy 

that “has been haphazard, driven more by political expediency than by 

any underlying philosophy.” As a result, “Germany’s policymakers seem to 

be stumbling from decision to decision” and “reacting with no clear 

sense of direction to the demands of the moment.”

Only non-Germans, it seems, need to stick to the rules.

Defending Europe

Some fear that Germany’s foreign policy has become similarly two-faced. 

Slaughter is convinced that Germany remains a pillar of the West in 

terms of its allegiance to NATO and European unity. She cites a 

high-level report, “the product of several months of debate within the 

German foreign-policy and security community,” which “identifies 

Germany’s current values and interests as a commitment to ‘human 

dignity, freedom, democracy, the rule of law, and to an international 

order that is based on universal norms.’”

But Yuriko Koike, Tokyo’s newly elected Governor, is not so confident. 

She fears that the scale of Germany’s economic ties with Russia and 

China is injecting a form of “stealth neutralism” into the country’s 

diplomacy.

Indeed, Germany happily relied on the UK to take a tough stance against 

Russia after its annexation of Crimea and incursion into eastern 

Ukraine. Now, the UK’s departure may clear the way for a new Ostpolitik 

with Russia. As German Foreign Minister Frank-Walter Steinmeier 

suggested recently, “we should heed the lesson of détente: however deep 

the rifts, we must try to build bridges.”

Nonetheless, Europe, Steinmeier wrote last year, “remains the foundation 

of Germany’s foreign policy,” and that “Germany is capable of acting 

effectively” to shape global developments “only within a solid European 

framework.” Likewise, Wolfgang Ischinger, a former German ambassador and 

current head of the Munich Security Conference, argued well before the 

Brexit vote that “Germany has an opportunity to provide a counterweight 

to long-standing British objections” against a more integrated European 

Foreign and Defense Policy. “By putting its considerable influence in 

the service of a cohesive, strategically focused foreign and security 

policy,” Ischinger argued, “Germany would simultaneously achieve two key 

objectives: a stronger and more capable EU and a more European Germany.”

Slaughter takes this view a step further. She calls for a “deepening” of 

the EU “through measures that would include democratizing EU financial 

decision-making by directly engaging national parliamentarians and 

exchanging tighter European fiscal constraints on member governments’ 

budgets for a European banking union, a eurozone budget, and Eurobonds.”

All of these ideas are of course currently anathema. But Volker Perthes, 

the chairman of Stiftung Wissenschaft und Politik (the German Institute 

for International and Security Affairs, which published the report cited 

by Slaughter), seems to understand that hostility to further European 

integration is incompatible with Germany’s own security.

Germany’s willingness to play a greater role in a common foreign and 

defense policy reflects a fundamental truth: the “dividing lines between 

domestic and international affairs,” as Perthes puts it, “have become 

increasingly blurred.” Exhibit A is the refugee crisis, which “demands 

policy interventions in areas as diverse as defense, development aid, 

European integration, domestic security, and social-welfare policy.”

However Jacek Rostowski, a former finance minister and deputy prime 

minister of Poland, is unimpressed. He goes even further than Koike, 

arguing that Germany’s “misguided imposition of austerity on the 

eurozone has undermined European political cohesion, thereby opening the 

door for Russian revanchism and aggression.”

In Rostowski’s view, US presidential candidate Donald Trump has a point 

in accusing European NATO members of free-riding on the US. Only four 

European NATO states meet the Alliance’s 2%-of-GDP target for defense 

spending. One of the four, ironically, is Greece. By contrast, Germany’s 

defense spending, at just 1.2% of GDP, falls far short of its 

obligation. Rostowski doesn’t mince words: “The US should tell Germany – 

in the same no-nonsense terms that Germany used with Greece – that it 

cannot defer to the US for its security while undermining Western unity 

to protect its taxpayers from possible intra-eurozone liabilities.”

Burden-Sharing German-Style

If Germany and the eurozone countries are serious about resolving the 

euro crisis and halting the EU’s unraveling, a more federal 

institutional structure is needed, so that internal trade imbalances can 

be corrected through obligatory transfers of resources from one part of 

the currency union to another. Of course, Germany would have to 

contribute the most to stabilization efforts, which is why it has 

resisted such moves in the past.

Last year, however, Otmar Issing, a founding ECB board member and chief 

economist, wrote that “Europe’s current crisis has convinced many that 

existing institutional arrangements are unsustainable,” and suggested 

that the absence of “progress toward political unification” since the 

euro’s introduction “may be about to change.” Brexit has certainly 

confirmed Issing’s diagnosis, if not his forecast.

Issing himself is highly skeptical of prospects for political 

integration: “voters are far from enthusiastic about the prospect of 

ceding more authority to Europe.” And, in the absence of “true political 

unification,” any “transfer of fiscal competencies to the European 

level” would imply “serious risks.” As a result, for the time being, 

“political responsibility for higher transfer payments among countries 

must remain with the national governments, controlled by national 

parliaments and electorates.”

Political unification, too, carries risks. “The danger”, argues 

Hans-Werner Sinn of Munich University and the Ifo Institute, is “that 

collective decision-making bodies not only provide services that are 

useful to everybody, but also may abuse their power to redistribute 

resources among the participating countries.”

For Sinn, this is not merely a matter of closing the EU’s infamous 

“democratic deficit” – the supposed lack of accountability that played a 

large part in the Brexit vote. (In fact, the most important decisions at 

the European level are made in the European Council, which comprises all