Germany at the crossroads

August 30, 2011

By Laurence Copeland. The opinions expressed are his own.

Baby-boomers like me, who grew up in the shadow of World War II, have to acknowledge with gratitude that the Germany which again dominates Europe is in most respects a model democracy – multiracial, prosperous and contented. However, there is one worrying aspect of the German mentality which seems to have survived intact from its unhappy history, and it is an aspect which is likely to be tested to the full in the coming weeks and months.

From the moment when the Maastricht Treaty was dreamed up in the early 1990s to the inception of the euro zone in 1998, Germany had any number of opportunities to kill the project off and indeed, time and again, policymakers in Bonn or Berlin or Frankfurt voiced their reservations in public. The Bundesbank, in particular, with its overwhelming prestige, spoke out forcefully against what it saw as the dangers of premature monetary union.

Yet, while Tony Blair, who dared to take Britain to war in Iraq in the face of overwhelming public opposition, nonetheless baulked at taking his country into the euro zone without a referendum, and while France actually had one (which the pro-Maastricht side only won by a whisker), Germany’s leaders felt no such need. On the contrary, Chancellor Kohl famously rejected the idea of consulting his electorate on the grounds that, if the opinion polls were to be believed, he would almost certainly lose.

What is it about the Germans that makes them willing blindly to follow a leader, even though they fear he is taking them over a cliff? Am I alone in finding this a worrying national peculiarity?

I raise this question now because the problem of what to do about Greece means that Germany stands at another fork in the road. Forget the technicalities and the small print, important though they are, and focus on the critical issue of principle which precedes it: is Germany going to give in and allow some form of fiscal integration to be introduced by the front door (unlikely), by the back door, the tradesman’s entrance or the catflap? It is coming under increasing pressure to do so from all sides – euro-politicans, commentators, economists, right-thinking or unthinking members of the chattering classes – in fact, almost everyone except those who will end up footing the bill i.e. the taxpayers of Germany itself, who for some obscure reason are a lot less enthusiastic.

This may be the last chance for Germany. One shudders to think what will happen if Germans are saddled with supporting the rest of Europe in perpetuity – which is what is involved, as Frau Merkel seems only too well aware.

Of course, any favoured “solution” will never be presented in such blunt language. Eurobonds or whatever other mechanism is dreamed up will arrive swaddled in blankets of euro-fluff, intended to reassure all and sundry, but most especially German voters, that there are plenty of safeguards to stop member countries free-riding on their hard-earned taxes.

But in reality it is extremely hard to invent enforceable sanctions on sovereign states. Anyone who doesn’t believe this need only look at last week’s Finnish proposals for Greece to provide collateral before it gets any further loans. The conditions put forward by Finland, though unlikely to be acceptable to the Greeks, are nonetheless not strict enough, because they would almost certainly prove unworkable in any actual default scenario – in practice, Greece’s creditors would never actually get their hands on much of the collateral without recourse to military action (how do you foreclose on a Greek port when it is occupied by the workforce? how do you get control of an airline when its staff are on strike and on to the aircraft, probably with the support of the authorities on the spot?).

In any case, permanent fiscal integration would require these sort of measures to be implemented routinely, whenever a country’s debt rose to a threatening level, which is obviously totally impractical.

The fact that the Finns have come up with such drastic measures is presumably a sign that they find it as hard as I do to take seriously some of the other proposals on offer, notably the idea of imposing fines on countries whose fiscal policy is too lax – as comic material goes, this is about as fresh as a mother-in-law joke, and in just as poor taste. (Why not supplement fines by endorsing a country’s borrowing licence, so that when it gets to twelve points, it’s banned from the bond markets?).

In the end, there is no escaping the fundamental question. In Germany itself, Wessies complain about subsidising Ossies. North Italians are fed up with supporting the mezzogiorno indefinitely. In Spain, the regions are in continual dispute over sharing out tax revenues. And as for little Belgium, don’t even ask.

Against this background, what will happen if the German public wake up one day to find that they have allowed themselves to be saddled with supporting ClubMed plus Ireland plus France plus new euro zone members from Eastern Europe (who, however parsimonious they are today, will realise it makes sense to loosen their belts once they are safely inside)?

There is surely no route out of the current mess which is not going to put intra-European relations under severe stress and leave a legacy of bitterness for decades to come, but from a long term perspective the least damaging course of action for Germany and Europe seems to be a relaunch of the Deutsche Mark.

When the idea of European monetary union was first proposed in the 1990s, I thought it only made sense to introduce the euro alongside the existing currencies, leaving everyone free to decide which money to use in any given transaction – very much as people in many countries today do some of their business in dollars or euros and some in their own national currency. Of course, it was never likely that Europeans would be left free to choose, in this area or any other, so the idea of a multiple currency area was a non-starter. But it’s an ill wind etc., and Brussels may now have to swallow this outcome as the only escape route from the current crisis.

As it happens, right now, as investors turn to gold and the Swiss Franc out of despair at the obvious weakness of the dollar, the euro, the pound and the yen, there may be a window of opportunity for a relaunched currency under the sole control of the Bundesbank. The massive windfall from issuing such an internationally attractive new money – seignorage as economists call it – would be available to cover the cost of refinancing the German banks and maybe providing a considerable measure of support to the struggling ClubMed countries, with the difference that, this time around, a subsidy would be totally at the discretion of Berlin and Frankfurt.

I suspect all this may still be some way off.  In the meantime, I am mildly encouraged whenever I hear it said that in the current crisis Germany has failed to provide leadership, which seems to mean that it has been unwilling to endorse a one-sided Transfer Union. After all, for Germany and for Europe, better not to be led at all than to be misled.

Image — Germany’s Chancellor Angela Merkel attends a news conference during her visit in Ljubljana August 30, 2011. REUTERS/Srdjan Zivulovic

Comments are closed.

  •