Can the rest of Europe stand up to Germany?

By Anatole Kaletsky
June 20, 2012

As financial markets slide toward disaster, scarcely pausing to celebrate the “success” of the Greek election or the deal to recapitalize Spanish banks, the euro project is finally revealing its fatal flaw. One country poses an existential threat to Europe – and it is not Greece, Italy or Spain. Every serious proposal to resolve the euro crisis since 2009 – haircuts for bank bondholders, more realistic fiscal consolidation targets, jointly guaranteed eurobonds, a pan-European bailout fund, quantitative easing by the European Central Bank – has been vetoed by Germany, and this pattern looks likely to be repeated next week.

Nobody should be surprised that Germany has become the greatest threat to Europe. After all, this has happened twice before since 1914. To state this unmentionable fact is not to impugn Germans with original sin, but merely to note Germany’s unusual geopolitical situation. Germany is too big and powerful to coexist comfortably with its European neighbors in any political structure ruled purely by national interests. Yet it isn’t big and powerful enough to dominate its neighbors decisively, as the U.S. dominates North America or China will dominate the Far East.

Wise German politicians recognized this inherent instability after 1945 and abandoned the realpolitik of national interest in favor of the idealism of European unification. Instead of trying to create a “German Europe” the new national goal was to build a “European Germany.” Unfortunately, this lesson seems to have been forgotten by Angela Merkel. Whatever the intellectual arguments for or against German-imposed austerity or the German-designed fiscal compact, there can be no dispute about their political import. Merkel’s stated goal is now to create a “German Europe,” with every nation living, working and running its government according to German rules.

Merkel doubtless believes that she is helping Europe when she maternally instructs the Greeks, Italians and Spaniards to “do their homework” and so become good little Germans. But like its less benign predecessors, this effort to impose German hegemony is guaranteed to fail. Europe’s leaders must therefore start considering a previously unmentionable question, perhaps as soon as next week’s summit, if the euro crisis intensifies. This question is not whether Europe will agree to live under German leadership, but whether Germany will agree to live under EU leadership – or whether the other nations must form a united front against Germany to prevent the destruction of Europe, as they have repeatedly in the past.

To be specific, the euro’s only chance of survival now depends on a decisive move toward political and fiscal union. Angela Merkel plays lip service to such political union, even claiming that democratic accountability is her main condition for financial rescues; but what she means is accountability to German voters, German newspapers and German constitutional judges. She promises to “do whatever it takes to save the euro” but vetoes anything that might actually work, claiming deference to German public opinion or national interests.

Europe must now call this bluff. At next week’s summit, France, Italy and Spain can turn the tables on Merkel by presenting her with an ultimatum: Led by President Hollande, who has abandoned President Sarkozy’s Gaullist pretensions of parity with Germany, the big three Mediterranean countries could agree on a program that really might save the euro: a banking union, followed by jointly issued eurobonds and backed by ECB quantitative easing. If Merkel tried to block these policies, the others could politely invite her to leave the euro, since Germany’s political pressures evidently made membership impossible on terms its partners could accept – essentially the proposition Merkel put last month to Greece. Without Germany, the euro zone would have much smaller internal imbalances and much more political coherence, with a much weaker currency and higher inflation, both of which would make debts easier to resolve.

Merkel would probably insist on Germany’s legal right to remain within the euro, ironically echoing the Greek position. At this point the other nations could play their trump card: To reduce interest rates and make their economies more competitive by weakening the euro, the debtor nations could vote for unlimited bond purchases by the ECB. The Germans on the ECB council would doubtless oppose this, but even with support from Finland, Slovakia, and perhaps Austria and Holland, Germany could command no more than 7 votes out of 23. Germany would then face the very same existential choice about its relations with Europe that Merkel has inflicted on Greece and other debtor nations.

Germans will almost certainly support the political concessions that might give the euro a chance of survival, including fiscal transfers and some mutualization of debts, once they realize that their only alternative is isolation from the rest of Europe. But before they agree to a European Germany, voters may need to be reminded that trying to create a German Europe always leads to disaster.

PHOTO: German Chancellor Angela Merkel (R) and British Prime Minister David Cameron arrive for a statement to the media before bilateral talks in Berlin, June 7, 2012. REUTERS/Tobias Schwarz


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Appreciate the heads up bill but rather see Germany out of the Union, they have mucked things up for too long now.

Posted by Abraham.Carter | Report as abusive

Well, it is funny when people scoot over the fundamentals, why is Southern Europe/US/UK suddenly so uncompetitive. Were developed economies well-prepared for the consequnces of globalization and technology integration. Outsourcing of manufacturing/services to developing economies has started to take it’s toll on Europe/US. Look at the size of labour pools in China/India, look at their cost competitiveness.

A services job in Bangalore costs at-least four times less compared to a seat in London. Can anyone stop the Capitalists from capitalizing on such lucrative cost-benefits. Sooner or later Germans will face the pain too. This decade is the great moderating decade characterised by gradual decline in wealth levels of developed countries and increasing living standards in developing ones, till the twain meet mid-way sometime around 2018. What we have seen is just the beginning as it is gogin to be extremely tough for any developed nation to maintain cost-competitiveness. While greedy Capitalists go on to destroy the very nations that helped them become great.

Beware Germans, even the likes of Mercedes have begun outsourcing their R&D to India/China. Germany has been the last one but it will fall soon too.

Posted by Asterix1985 | Report as abusive

If we could get everyone in Germany to read this bit of bigoted agitprop – they would dump all of the Euro beggars next week and go back to the Deutschmark.

Posted by Parker1227 | Report as abusive

If Mr Schaeble and Ms Merkel are Nazis, then Mr Kaletsky is a Red, and a Churchillian one at that.

Posted by REMant | Report as abusive

I’m sure 3/4ts of German voters will support the return to Deutsche mark. Maybe, that’s why Mrs. Merkel insists on her policy? Either the rest of the Eurozone will follow, or Germany(and maybe Finland, Austria etc) will form their own separate “Euro”, mark whatever. The dutch will follow and reincarnate the gulden. The rest, who will be left with Euro – will be bankrupt in 2 days. German, Dutch, Finish and Austrian savers and retirees will exchange their euro savings to new currencies, which would probably appreciate slightly. And the Latin block will have euro depreciated, their savers and retirees will be more and more poor with each step of QE-a-la-France.
This way Germany with it’s strong and robust economy, will be able(and probably will have to) emit enough new Deutsche marks to stimulate it’s own economy and depreciate the new currency just a bid, to, say, original euro parity with dollar. Two bunnies are killed with only one shot. Well, actually three – Germany will sober from her europe-dreams and follow UK, Switzerland and Japan into ordinary prosperity.
Good plan Mr.Kaletsky! Thanks!

Posted by Avgur | Report as abusive

To Parker1227 – very well said. It’s a typical Agitprop indeed.

Posted by Avgur | Report as abusive

Dear Mr. Kaletsky, do you always publish such overpatriotic warmongering rubbish? We are FAR FROM the 2 world wars. Germany is not starting a war! Germany saved well and is now trying to save the rest of Europes behind. And all you can publish is your patriotic war rethoric “Can the rest of Europe stand up to Germany?” The point is not to “stand up to Germany”, the point is that Germany wants to stand with the poorer nations and help them BECAUSE WE CAN. That gives us the responsibility to face up to doing it and helping them. God knows how many Billions we already gave to greece and Spain. Your comparisons are completely unacceptable in a modern Europe and if anything they stir hatred, mistrust and non cooperation. But if you prefer to go on a confrontational course by default, then I suggest you start first by reevaluating your objectivity.Your article is a masterpiece of subjective, predjudiced, editorial rubbish. Is that how you invest your spare energy in your spare time? Shame on you! Why not do something constructive instead? Give some of YOUR money to the greeks!

Posted by Spongebob17 | Report as abusive

If the poorer nations are in the dumps because they dont know how to manage their finances, they should be grateful that someone who does know how shows them. We germans are happy to help, but we will not throw all of our money into a black hole forever. Eventually the nations that dont know how to save WILL HAVETO LEARN IT and if they dont, they will not be supported forever, because also “rich germany” does NOT have unlimited funds. So QUIT WHINING AND GET TO IT TAKING THE LAST CHANCE YOU HAVE, while someone else is still willing to pay for YOUR mistakes.

Posted by Spongebob17 | Report as abusive

Everything the author lists as being vetoed by Germany has occurred, therefore either Germany are powerless, and not a threat or they’re accommodative and supportive, the very opposite of a threat, either way, if you must be anti germanic be more inventive or more accurate.

Posted by GraemeL | Report as abusive

I would like to see Mr Kaletsky advising his rich clients to invest billions in the new southern euro zone, without guarantees from the northern Europeans.

It is not only Germany that feels that the rest of the world is insane borrowing ever more. The conservative half of US feels the same although it does not stop them to blame Merkel for their troubles. Where is the guarantee that growth packages will work? What will they do? Build more apartments in Spain or plant more olive trees in Greece? They will help bankers and other speculators, that’s for sure. And German and Slovak taxpayers are supposed to guarantee this. You are on dope!

There must be fiscal austerity first. But that does not mean that the poor have to take the brunt of it. There is enough money in every one of those countries to get them out of trouble. It is just that the elites don’t want to give any back.

After the austerity there must be a calm talk about fixing the imbalances. Somebody will have to be told (or given incentives) to build factories in Greece, etc.
But this will will have to be done across the world economy, not just Europe. China will have to come to the party.

Posted by aussie66 | Report as abusive

The comments above say it all really. The author of this article must have downed a couple of bottles before he hit the word processor on this one.

The greatest threat to Europe is quite obviously the USA. 1) If the Republicans get in and cut state spending, we’ll all enter a great depression we might never recover from. 2) Fomenting conflict in Syria, funding Islamic terrorists, and fanning the flames with Turkey right on the border of Europe, is not helpful to say the least.

Posted by FrankSz | Report as abusive

It seems, that Mr. Kaletsky have an emotional problem with Germany which may twist his point of view a little. What is the reason that anglo-american “speculators” know so exact what is right or wrong for Europe? It is simple fear on their own investments. Since the German economy is still based on productive growth not on financial growth, the growth is real growth. In terms of financial markets view points it’s a “under performing” growth.
To create the Euro was a stupid act of politicians to do the third or fourth step before the first. Since it became reality everybody have to deal with it. If you look to the history before the launch of the Euro currency you might see, that 6 to 8 % yield on southern European countries was normal in their old currencies. Even in the historical best economical situation of Spain and Greece in the past the unemployment rate was never under 12 % because of their internal employment system and the acting of the (most socialistic) unions which promotes people in job and pay against jobless people. Especially youth unemployment was also in best years of economical history in this countries barely under 20 %. Having the Euro this countries invest in infrastructure partly monumental projects, without putting to focus of the necessity of those projects. An unhealthy melting pot of construction industry. financial industry and politics tried to imitate the american subprime system in a Spanish way. With the Euro they had first time access to very low yields and they made excessively use of it. The yields in their old own currency hold them off from those debt financed investments.
With Euro in hands and low yields first time in their history, they over invested in Spain. Greece manipulated their qualifying figures to be qualified for the Euro entry. And, after they have been in they used the Euro as a self servicing institution. 14 months pays, sometimes even more. The economy was strictly regulated. i.e. for a taxi or a trucker license you had to pay several hundred thousand Euros to get permission and so on. Italy, a very well structured country with a good economy and production lost 10 years, because its leader Berlusconi did only few to secure the future of Italy. He withstood 51 attempts by the parliament to be send out of office. Beside he tried heavily to influence the independence of the media, the court and celebrate his legendary Bunga-Bunga-Parties with underaged young girls. A lost decade for Italy. Just in that time China emerged as manufacture in competition to Italian industry.
Ireland and Portugal are less problematic. Ireland will manage the crisis first, because of their straight austerity program a banking problem might remain.
Germany, after solving the productivity problems by lower wage increases than productivity increase and inflation over years!! opened simultaneously its labour market and softened substantially the strict labour law, reformed the pension and health system with deregulated law changes to the disadvantage for the employees, retired and thick people. At the same time easing law for entities and wealthy people.
The result of all this was a growing economy with a strong export orientation. The Euro helped Germany to be competitive in the world market and inside the Eurozone and the European union. In the financial crisis 2008 Germany launched a stimulus program for the car industry giving 2500 € subsidy to consumers who exchange old polluting cars against clean modern cars, if they dump the old car and not sell it. That helped the German car makers to survive in the crisis. Second Germany supported companies not firing people but holding them in place under certain conditions. That helped German economy to overcome the crisis quicker than other counties.
Now, you blame Germany not helping or doing enough to overcome the crisis. Yes, Germany will do, but before that the southern European countries must do the reforms that make a help successful. Helping now, without structural changes, just burn money, not more. Beside, everybody is free to help Greece and Spain.
But financial markets don’t do it for the same reasons Germany request changes.
What, if Eurozone overcome the crisis and trust will be restored? Than, immediately USA and UK debt come on the table. 16 Trillion on debt in USA might ask then to go a kind of austerity path to reduce the debt. This might be only possible to go back to manufacturing and real growth out of produced values not only through growth generated on papers.

Posted by HECConsulting | Report as abusive

Scrap the Euro! Then it’s each to our own with less cost.

Posted by cyberdesigner | Report as abusive

Is that a joke? Drowning debtors will teach the people on the boat what to do? Without Germany all those guys will go bankrupt in a couple of days. And if Americans love the Southern European countries so much, please, save them! Issue common bonds with Italy, Greece and Spain! Good luck with that!

Posted by tk2 | Report as abusive

As sensible as Mr. Kaletsky considerations are, they lead to the wrong conclusion.

More Europe, that is full integration, will not do. It is sufficient to scroll the comments to his article.

Just hint to funds transfer from Germany to the perifery (which is what a fully-fledged union would entail) and you’ll have the “Nazi” take over the Reichstag the next day…

The only (move to)a solution to the prest woes is the demise of the Euro, which will inevitably come about.

Then we will see how the Teutons will manage selling their stuff to the Chinese…

Posted by pietrogori614 | Report as abusive

It is a shame to read this kind of analysis from an INET Board Chairman, since it does not add any value at all in times of turmoil. A disgusting piece of rubbish, obviously driven by a mixture of envy and anti-germanic thought patterns. Mr. Kaletsky has, firstly, forgotten who triggered the whole financial crisis, the greed-driven communities of Wall Street and London City. Secondly, in times of crisis, someone has to lead and I would always prefer an approach, that embraces austerity measures as proposed by Germany, the Netherlands and the Nordic countries, in comparison to a southern lifestyle sustained by credit. As a German let me advise you: nobody in Germany is navigating towards a “German Europe”; as a British economist Mr. Kaletsky might still think in terms of the usual german-bashing if something has gone wrong, but if this is the only analysis he can offer, it is old-fashioned and steems from the well known but annoying phobia generated by an inferiority complex and envy. Wake up, Mr. Kaletsky, and do not bother us with your analysis any more, it is a heap of crap. It is sickening to digest outdated thought patterns. Stop research, you will not learn anything new, and go play golf.

Posted by TA1 | Report as abusive

There is a strong sense of Europe and being european deep within France… Even Lepen’s party had become less vocal against the European project because french people regard the European project as sacred. But wether Gaullists or Socialists, french see Europe as a Franco-German driven car. The goal of Europe for most french people is to avoid destructive competition between these two countries, and harness energy to put it in a mutually benifiting project… The associaion of “Club Med” is essential to most french citizen, that is why they have been supportive of bail out plan… Do not forget that France also pays of Greek bailout, not only Germany… But the association of Germany is central… To us I must say a Europe without Germany has just no sense… The exit of Germany defies the purpose of Europe in the first place… Does Germany want to play the regional superpower house again, like some start to question in France? That is for the future to tell… But the division of Europe between north and south could not bode well of the future of Europe, hence the world…

Posted by kebrab | Report as abusive

India China are watching this Euro crisis with much amusement. Yesterday’s Lords are today’s loan- beggars. Germany is exception out of them-kudos to them. They are themselves ever hard working rational people, with not much lord- like tendencies. Incredible that they paid back billions of $ as war ransom and are still ahead of even those to whom they paid it. They are more patriotic than capitalist hence will survive all onslaughts of BPO. Their only problem is they are still made to feel guilty of the crimes their ancestors committed and hence willingly or unwillingly still have to serve slavish gestures to the most powerful US(and it’s turnkey Israel). This wont be needed if they advance militarily. The world dictum is military Might is always Right. This time WW3 won’t start from Germany, rest assured, it will start from Greater Israel.

Posted by Rdabrludba | Report as abusive

So – you don’t mention the deficits being run-up by these governments and their socialist programs. I assume your solution is to devalue the new euro currency every 10-15 years. I’m sure bond holders won’t be wise to that ruse.

Posted by JohnRamella | Report as abusive

At this moment the “risky” Greece, Spain, Portugal and Italy are paying a regulatory subsidy to “safe” Germany.

The largest threat to Europe are the outright stupid financial nanny regulators who, by means of capital requirements for banks based on official ex ante perceived risk, first gave the banks excessive incentives to lend excessively to many sovereigns, and that, after the damage had been done, are causing the banks to retreat even faster from those messed up sovereigns. It was they who did Europe in!

Posted by PerKurowski | Report as abusive

Mr. Kaletesky,

This sort of ‘Aryan NOT mentality hearkens to the old premise that dying economies(like the GBP) can subvert a new economy*consider that Germany’s economy, rebuilt, like Japan’s is less than 70 years new, compared to GB in the 200 year plus range, and US(where I am from) approaching 145 years). This is like complaining about new technology, and grasping firmly on a lead pencil.

I submit that the hierarchy of needs(Pavlovian is it not) has no room for retrenchment, and historical which sounds a log like hysterical biases against ancient ills. Time to wake up and realize that a nation, culture, society, can not drive into the future, by focusing on the rear view mirrors(the past history) when the wind screen squarely faces the future.

Or like Einstein you can get a bicycle and ponder if the speed of light ride has an image that even appears in the mirror.

Patrick D
Chief Encouragement Officer

Posted by MyDriveIsGreen | Report as abusive

The Germans would have to do some major manipulation of the DM which would sky rocket in value if Germany were to leave the Eurozone. Its currently over hyped, over priced and definitely over rated products would go much higher in price and cause a major recession in Germany from a collapse in sales. So Germany is benefiting greatly from its neighbors’ fiscal problems that keeps the Euro at a low and does not wish to see any change in the current status..

Posted by tchirn | Report as abusive

“Nobody should be surprised that Germany is the greatest threat to Europe”

This pseudo Communist is out of his mind. The threat has been and is the States that SPENT beyond their means. That’s the threat.
It’s like saying those who pay their mortgages are a threat to the Real Estate market and NOT THE ONES WHO QUIT PAYING – idiot.

Posted by ThomasMacso | Report as abusive

As usual, we get nothing but the standard Europhile ‘more Europe’ and ‘more Euro’ and ‘more integration’.

And as usual, this author puts on display his ignorance of the real issue: the Euro IS the problem. The Euro IS the crisis. More integration will only make it worse.

Let’s have some referendums, because I am willing to bet that here in the Netherlands most do not want to give money to Greece, Spain, Italy (or rather: the banks who lent those countries money). We want our own currency back and we’d be better off for it.

Spending and borrowing is the problem. If Italy cannot afford to borrow, it should not borrow. It really is that simple. Stop borrowing!

And no, we the taxpayers do not want to be on the hook for rich banker’s debt, and to guarantee investors investments. We want the Euro gone. The Euro is the problem, and the solution is getting rid of it.

I hope us, Germany and even non-Euro Britain all leave the undemocratic EuroSoviet Union. Maybe Club Med can get France to cover the loss of those net contributions /sarcasm.

Posted by mvr75 | Report as abusive

Well, I’m dissappointed to read in a Reuters post of Mr. Kaletsky a text that puts WWI, WWII and the economic policy of Chancellor Merkel in a row – as if these three politics were similar or only comparably in intentions and means.
One may disagree in the subject of how to mend the economic crisis of Europe, the Euro in general and the mediterranean economies.
But should a country like Britain or the US put that in a context of “oh, these Germans try to conquer Europe again, this time by economic hegemony…” insinuating, of course, that Britain or the U.S. once again have to stand tall to save the world…
Especially Britisch politicians and economic blog-writers should remember how often it was -and is- Britain, that stood alone with their views and requesting special treament and policies – purely in their national interest with no respect and consideration whatsoever to the benefit the Europa as a whole.
And when it comes to economic policies and “sacrifices” the German economy surely can claim that huge amounts of money, taken from the German taxpayer, has been and will be going abroad. Yes, the German economy & national budget benefits quite strongly from the low interest rates and the higher level of attraction for German bonds compared to others.
I’m not too much a fan of Angela Merkel, I would prefer some other ways to solve the crisis. But: Will there be a British protest, if Chancellor Merkel travels to some European meeting of top leaders and – fed up with the permanent request, that Germany should guarantee for other nations loans – shouts: I want my money back?
Let’s not forget: A few of the problem banks that brought us into this mess resided on the British Isles and they screwd up, because the banking laws where flawed and the institutions responsible for controlling had much to close connections to the pulprits….

Posted by Brooks-was-here | Report as abusive