The danger of dictating to Germany

June 7, 2012

–Laurence Copeland is a professor of finance at Cardiff University Business School. The opinions expressed are his own.–

Having been bullied into swallowing European monetary union in 1998, the Germans are today being pressured on all sides into agreeing to one or more of a range of reforms – burden-sharing, Eurobonds, fiscal union, debt mutualisation, a banking union, joint deposit insurance  – all of which amount to the same underlying reality: Germany foots the bill.

But beyond the economics of these different proposals, there are more important concerns. If a political explosion is to be avoided, Germany must extricate itself from the mess as quickly and cheaply as possible, recapitalising the country’s own banking system and selling euro zone exit to its voters as a loss-cutting exercise: sunk-costs, a salutary lesson.

Many members of my own profession, who should know better (e.g. Howard Davies on this morning’s Today programme on Radio 4) argue that Germany derives enormous export benefits from having a fixed exchange rate with its neighbours. Not only are these short term benefits grossly exaggerated in the current situation where Germany finds itself selling goods to its neighbours in return for worthless IOU’s, and the future situation where Germany has to lend money to the other euro zone members so that they can buy its exports, but the point that Howard Davies and co are ignoring is at some point going to be obvious to Germans: they are being taken for a ride in the euro zone.

It is deeply embarrassing to listen to our Prime Minister lecturing the Germans about the need to solve the euro zone problem – only a few months ago, President Sarkozy told him in no uncertain terms to mind his own business, and the German Chancellor no doubt feels even more entitled to do the same. If Frau Merkel buckles under the pressure from irresponsible and short-sighted people like our own PM, there is a danger that Germans will at some point in the future wake up to find themselves in the same predicament as their grandfathers after World War I – saddled with crippling payments to foreigners, which they will feel are totally unjustified, and for which they feel no real responsibility.

It is dangerously unrealistic to expect them to simply shrug their shoulders and treat the payments as no more than reparation for the sin of successfully holding down their own labour costs while their neighbours lose control of theirs. Far from it – their reaction is unlikely to be anything less than intense anger, and could be far worse.

It is taken for granted that austerity cannot be imposed in Southern Europe without the legitimacy of an electoral mandate – even in Italy it is assumed that one will be required sooner rather than later – yet nobody seems to think that the proposed solutions to the euro zone problem need to be submitted to German voters for approval.

The air is thick with sage warnings about the dangers of political instability throughout the continent, backed up by ample footage of riots in Greece, indignados in Spain and the seemingly unstoppable rise of extremists almost everywhere. The implicit or explicit conclusion is invariably that the Germans must open their wallets to save Europe’s democracy.

Yet nobody seems to worry about the stability of Germany itself. Instead, it is taken for granted that somehow it is simply a matter of explaining to the man-in-the-strasse in words of one syllable why he should pay up and be grateful, and the problem will be solved.

It is to be hoped that this insouciance proves justified, because unrest in Southern Europe is a lot less worrying to anyone of my generation than the prospect of unrest in Germany, however long delayed.

Having grown up in the Third Reich and then studied history at university, Helmut Kohl saw integration as the ultimate guarantee of European stability and peace, in spite of the fact that anyone not totally blinded by Europhilia could see that this sort of policy was more likely to have the opposite effect, especially when imposed from above without any democratic legitimacy. Maybe the much-quoted philosopher George Santayana got it wrong after all, because in this case it seems as though it is precisely those who cannot forget the past who are condemned to repeat it.



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