The German Problem | 16th February 2015

Why Germany’s identity will define the future of Europe | The foundations upon which the European Union was built suddenly look vulnerable. The 1957 Treaty of Rome and its predecessor, the 1951 Treaty of Paris, laid out two founding principles: firstly, to establish a Customs Union across the Member States to promote free trade and secondly, to prevent a recurrence of major war in Europe. Economic and geopolitical events of the last month have exposed fault-lines in the subsequent treaties, pacts and agreements that now call into question Europe’s enduring capacity for compromise and demand leadership. The answer to the challenges faced may well be Germany. And that’s the problem.

Europe faces two imminent challenges that even an ardent pro-European cannot ignore. First, the eurozone is vulnerable in its current form. Syriza’s victory in the Greek elections and alongside Draghi’s commitment to €1.1tn of Quantitative Easing (QE) have thrown into sharp relief the fact that Europe’s Stability and Growth Pact did not cover off responsibility for unsustainable national debt. Under a pure monetary union, this would be done on a risk-sharing basis with the ECB as the lender of last resort. The ECB was mandated to ensure price stability, not to be the lender of last resort and the German Constitutional Court cannot agree to the “Transfer Union” that such a mandate would entail. However, in the absence of a lender of last resort the scope for compromise and loose ends threatens the eurozone – not because a compromise won’t eventually be reached on Greek debt, but because of the likely effects on the terms of other debtor nations.

It won’t be easy but Germany owes much to its co-evolution with Europe and within Europe. Hence it must take some responsibility for the position that the bloc is now in. The symbiotic relationships in trade and supply chains across the continent have helped drive its economic success. Some would argue this is at the expense of poorer nations since its substantial trade surplus perpetuates the internal eurozone imbalances and makes it harder for peripheral Europe to sell into Germany when demand there is flat. Effectively, the surplus means that Germany can export its deflation across the region and while this is in the short term a boost to the peripheral nations, over the longer term it has the potential to stave off investment and dampen demand. Delta Economics’ forecast of -3.7% for intra-European trade in 2015 suggests that the problem is already evident.

Further, Germany is committed to fiscal discipline and stability but Europe has interpreted Germany’s focus on austerity as cost-cutting and deficit reduction. While this is undoubtedly valid to an extent, the German word Sparsamkeit has been translated as austerity when it can also just mean thrift, or even financial prudence. Germany’s economy is built around sensible financial management in the short term and steady economic growth in the long term. The assimilation of eastern Germany into a unified Germany was a testimony to how the model works.

But it was not without struggle: it took more than 15 years and a structural reform process, particularly in welfare through Hartz IV, that was painful for many Germans, not just those from the east. The misunderstanding both of the German word itself and of the pain that Germany has been through has engendered mistrust of German motivations within Europe. It has also added to frustration within Germany of the failure of Europe or the world to understand either the reform process it has been through or its longer term emphasis on growth.

Germany, in that it is committed to the euro and European fiscal union, needs to be clear as to why it opposes full risk sharing and Transfer Union on constitutional grounds as well as experiential grounds. It cannot intervene in the affairs of an outside nation and although it can change its constitution, this would take an absolute 2/3rd majority in the Bundestag and a 2/3rd majority in the Bundesrat. These votes were taken for the first tranche of QE. Full transfer union, embodied by risk sharing and the ECB’s role as lender of last resort, is currently unconstitutional. Changing it would be unpalatable both to politicians and the German voting public for historical reasons quite apart from the recent experience of reunification. But if Germany objects, then it must also provide alternatives in a way that allows other Member States and non-European countries to trust them.

The second challenge is Russia’s involvement in Ukraine. Ukraine is not a NATO member but it is still strategically significant given its proximity to other European states. Further, shared norms and values tie the US to the continent and in spite of occasionally more belligerent rhetoric, Europe’s problem is also the US’ problem. Angela Merkel and Francois Hollande’s mission to Moscow aimed to impress the need for a diplomatic and sanctions-based solution to Russia’s on-going action in Ukraine. Merkel’s trip to Washington aimed to do the same. This embodies both the strength and the weakness of Europe’s security strategy: it is steeped in the language of “soft” power, which is highly reflective of Germany’s influence as a Civilian rather than a Military power.

Some may argue that Germany is not the best nation to lead the negotiations because of its trade interests in Russia and the Ukraine. However, Germany’s status as a soft power means that it is motivated by a genuine desire to avoid war. This stance is a legacy of historical experiences which have become deeply engrained in its security culture. And this is the essence of Germany’s, and indeed the European Union’s, problem: its interests are couched in economic terms but its primary purpose is to avoid war. Indeed, Germany’s Basic Law (Grundgesetz) bans “aggressive” military operations and its role within NATO has until recently largely been peacekeeping. Yet Europe led by Germany has the potential to act as a “softer” counter-balance to the “harder” NATO or US stance. Germany is consolidating its role as a quiet but dominant power.

Germany itself struggles to acknowledge, or even define, this “quiet dominance” because of its 20th Century history. Yet it is looked to for a lead both within the European Union in economic terms and, increasingly on a global stage for political leadership as well. The relationship is symbiotic: the EU exists to limit German hegemony, as does the German constitution itself; Germany prefers to be within an international trade and political bloc as a means of coming to terms with its past.

Germany holds the answer to Kissinger’s question: “Who do I call if I want to speak to Europe?” It needs, metaphorically of course, to pick up the phone. It must recognise that it has a responsibility as an economic and geopolitical power globally, not just in Europe. Europe is facing a geopolitical as well as an economic crisis and Germany must acknowledge its responsibilities as the voice of Europe. Equally, however, Europe must not expect too much of Germany: it still wrestles to come to terms with its own and unwillingly gained role as a Global Civilian power.


The German Problem  |  Author  |  Rebecca Harding  |  CEO