(Article submitted for publication in the Project Syndicate)
The centrality of Germany¢s position in Europe and, more widely, in the world at large is amply documented in historical analyses of the last few centuries. The main focus of contention in the continent¢s major struggles for supremacy, led by such diverse actors as the Universal Monarchy, attributed to Charles V, Phillip II and Louis XIV, the caliphate of Suleiman the Magnificent, Napoleon, Imperial Germany, Hitler¢s Reich, the Soviet Union or the forces composing the European Union today, was Germany. Her strategic position at the heart of Europe as well as her huge economic and military potential define a clear thread running through European history.
Bismarck set the pace for this potential to be realized and dominate European politics until the end of the Second World War. After the interlude of the Cold War, when Germany emerged as the apple of discord between East and West, the reunification permitted the reassertion of German power within the context of the European Union and, most notably, the eurozone.
The question arises as to whether Germany is ready and willing to provide leadership in the conduct of the EU¢s affairs. And if so, what end will it fight for. Europe is currently facing the most challenging crisis of the postwar period. Recession is sinking in for a sixth successive quarter, spreading to core countries. Unemployment, above 12%, is a record on average. In Spain and Greece, it represents one quarter of the labour force while among young people the rate exceeds 60%. High government deficits persist despite harsh austerity, and banks remain undercapitalized and unable to support a sustained economic recovery. Social malaise is deepening with expectations, and actual prospects, for economic improvement being negative and likely to remain so for the foreseeable future.
Faith in the European project is declining and, as the eurozone lacks cohesion, stagnation and recession may lead to a fatal popular rejection, accompanied by serious challenges to democracy such as the rise of neo-fascist parties.
Despite the risks associated with the present situation, European leaders remain remarkably inactive, apparently reassured by the effectiveness of the promise given by Mario Draghi, the president of the European Central Bank (ECB), to “do whatever it takes” to protect the monetary union from collapse. However, prolonged inaction, induced by the relative calmness in financial markets, will perpetuate stagnation and eventually lead to a break-up of one sort or another. Either gradual attrition, with weaker countries defaulting, will lead to a more restricted German-led club of “virtuous” countries, or Germany herself will choose to pursue a policy of narrow fiscal advantage, by seceding from the common currency.
Political and economic weakness of France and Italy, together with Britain¢s gradual pulling away from the EU affairs, highlights the key role of Germany for rescuing the eurozone from the present crisis.
Leadership involves a sense of direction and a willingness to pay up. From ancient Athens to present-day Washington, the paradigm stays the same. Despite Angela Merkel¢s political qualities and standing, the German government lacks a concrete design for the “ever closer Union” the treaties call for and, therefore, it is in a weak position for effectively mobilizing, on a European scale, the resources and the competences required to create a mighty global power.
Germany¢s handling of the crisis so far indicates a willingness to do as little as possible, as late as possible, for preventing the collapse of the euro. This policy cannot go very far. Either stagnation will lead to the eurozone¢s break-up, or circumstances will force a policy change.
What needs to be done is, at last, more or less clear to a wide circle of participants – or watchers – of the European policy-making process: Public debt should be partially and gradually mutualized. The banking systems should be unified so as to sever the ties between banks and sovereigns. Centralized supervision and resolution authorities as well as a deposit insurance scheme form the core of the banking union. Strong central institutions responsible to a directly elected parliament are needed for coordinating fiscal and economic policies.
In the shorter term, the single market should be extended to services and free-trade arrangements should be promoted either multilaterally or bilaterally with major trading partners such as the United States. Austerity should be eased, particularly in the fiscally stronger core economies, and substantial resources should be devoted for boosting youth employment and investment in small and medium-sized firms in the over-indebted countries.
German reluctance to lead Europe into a more cohesive globalised power scheme owes to a complex set of factors touching upon the country¢s history and the nature of its political system. Historical inhibitions to the very act of leading are hard to overcome. The persistence of prekeynesian economic orthodoxies, neglecting the importance of demand, does not help. A certain moral abhorrence to the “sin of borrowing” prevents moves to ease austerity policies because of the fear that they will be misinterpreted by the over-indebted countries as encouragement for relaxing their effort to implement reforms. The federalist structure of her system of governance favors parochial approaches relative to grander designs.
These obstacles should not be underestimated. They reflect real problems. They must be countered with arguments such as that reforms are difficult to promote in the context of deep recession and rising unemployment. And, therefore, the austerity-cum-reform agenda should be adapted by introducing a strong growth component.
However, the main responsibility for changing course lies with the Germans themselves. Will they accept that the alternative to a democratically unified currency union is a German economic hegemony which, in the longer run, will destroy the common European project and undermine the economic and strategic security of Germany itself? On a wider plane, will Europeans agree to meet global challenges by acting as a union, or will they choose to retreat into themselves and even split apart? These are some of the questions that Europe, and the world, will be faced with soon after the forthcoming German parliamentary elections.
Mr. Yannos Papantoniou was Greece¢s Economy and Finance Minister from 1994 to 2001. He is currently President of the Centre for Progressive Policy Research, an independent think-tank.
