The European debt crisis has been, and continues to be, a learning curve for all member states. While exposing the fundamental frailties of some nations – those economies that had been largely based upon ill-advised strategic borrowing decisions taken in the last decade – it has also served to highlight the economic integrity of others. Principally this is Germany, which for the past 50 years has steadfastly adhered to a policy of domestic industrial development and economic austerity.
But today, whereas some member states are struggling and require financial assistance from their more stable neighbours, austerity is also proving to be a very bitter pill to swallow.
The plight of Greece, and to a slightly lesser extent Portugal and Ireland, have been well documented. But Italy faces a similar fate. If Italy defaults on its debt of g1.9trn, the fallout could seal the fate of the eurozone.
Recently, Italy’s borrowing rate reached a record g7.5bn following a bond auction. Furthermore, the yield on its current three-year bonds is almost eight percent, and its 10-year bonds also have spiked to 7.56 percent.
History repeated?
But this problem within the EU has repercussions that have the potential to be felt much further afield. Goldman Sachs and some US banks guaranteed somewhere in the region of h1trn of European sovereign debt by selling swaps or insurance against which they have not reserved.
However, the fees these banks received for guaranteeing the value of European sovereign debt instruments has largely been dropped into a pot to report operating profits and pay bonuses.
This is the type of accounting that brought Lehman Brothers and AIG to their knees. Subsequently, if any of the European sovereign debt fails, US financial institutions that issued swaps or unfunded guarantees against the debt will be in for a massive shortfall. The failure of European sovereign debt, therefore, could have a spectacular knock-on effect, essentially re-igniting the US financial crisis. This could therefore culminate in a new round of bailouts and quantitative easing.
Germany, however, is the key nation to help save the euro, the EU itself, and any possible repercussions amongst countries that rely on sovereign loan repayments. The reliance on Germany is not simply because it is the wealthiest of all the EU nations, but because its industrial strength is one that could initiate and support a bailout fund.
Germany’s credentials as the leader of the EU began shortly after the second world war, when, in 1952, it became a founding member of the European Coal and Steel Community – essentially the precursor of the EU. Further to this, partly because of the curbing of its powers of autonomy in the wake of the conflict, but largely because of its astute policies, Germany has unwittingly propelled itself to the forefront of the EU pack, today shaping up as the only member state capable of implementing any form of economic or fiscal reforms to save struggling nations, and indeed the EU.
Standing on the shoulders of giants
While other major EU economies have failed or are in deep recession, Germany has posted growth of three percent for more than two years running. Nicolas Sarkozy, in a battle to win re-election, now openly cites Germany as a model and has enlisted German chancellor, Angela Merkel’s help in the campaign to repair his own damaged credibility.
Indeed, no other nation is better placed to lead the EU out of its current malaise. Since the euro crisis began in 2009, Germany has been the only country to have the financial shoulders to decree the double Greek bailout, and its unwavering demand for austerity help has seen the demise of the profligate Silvio Berlusconi in Italy and George Papandreou in Greece. It has also imposed what has been termed a fiscal compact for EU budgetary discipline.
Despite its prosperity and benevolent position towards fellow EU members, some states seem to have long memories. The unification of the East and West blocs in 1990 should have assuaged anxieties, but this, instead, seemed to re-ignite French, British and Russian fears over the new republic.
Since then its dedication to the EU – Germany having long been one of the most passionate supporters of European integration – should have been cause for celebration. But some quarters responded to Germany’s assertiveness with scepticism, unfortunately recalling the regime of the 1930s and 40s.
Furthermore, in more recent times, Germany’s opposition to the wars in Libya and Iraq was greeted with discontent and a sentiment of disunity. In short, whereas for many years within the EU Germany has held the same rights (and therefore the same obligations) as its neighbours, there remain within Europe people who worry about too much German leadership rather than too little German leadership.
Also, the austerity regulations that Germany and other leading member states has placed on member states such as Ireland & Portugal – with the ultimate objective of them maintaining their own autonomy and identity – has created resentment.
Finally, some commentators have pointed to pivotal actions or omissions by Germany in the mid-2000s that may have been the precursor to the crisis suffered in Southern Europe. From the beginning, there has been a method enabling the EU to police the economies of member states by following the rules that had been laid down for the single currency in the Maastricht Treaty. This was called the Stability and Growth Pact. In 2003, France and Germany had both overspent, and their budget deficits had exceeded the three percent of GDP limit to which they were legally bound.
Whereas the Commission had the power to fine them, the finance ministers – of what was then the 15 eurozone member states – gathered in Brussels and voted the Commission down, essentially letting France and Germany off the hook by deciding not to enforce the rules they had signed-up to and which were designed to protect the stability of the single currency. Some quarters have recently cited this event as one of the first breaches in European policy, and have suggested that Germany has assumed too much power in the wake of this.
The lynchpin nation
If Europe chooses to interpret Germany as an increasing global power that should be checked, then it only needs to look to its abstinence in the Libyan crisis, and should draw comfort from » its lack of interest in non-European conflicts, along with likes of Brazil, Russia, India and China, all of which have abstained from aggressive UN resolutions since 1973. As is the case with these undoubtedly powerful nations, Germany is not willing to deploy its military.
But despite its criticisms, Germany remains a crucial partner, whether Europe likes it or not. The EU needs to realise quickly that Germany faces a period of great uncertainty, is looking for international partners, and will be open and susceptible to external influences. This is an opportunity for increased interaction and conversation between Germany, its mainland European neighbours, and – perhaps crucially – the UK.
What many EU nations fail to realise is that Germany is, on the whole, sceptical of the EU, and increasingly this discord is forcing the power from the hands of civil servants and political theorists, and back into the proletariat. Essentially, the German people have a number of questions that remain unanswered, and these will be decided by votes of the majority, and this could have a dramatic effect on Germany’s position on the EU over the next decade.
Therefore, it is important to separate Euro scepticism from the realist perspective, both in Germany and in the rest of Europe. In the case of the Euro zone crisis, despite its growing appetite for ‘Euroscepticism’, in the short term it would make little sense for Germany to allow faltering Eurozone economies to default, and to remove itself from the single currency and the overall project of saving the euro.
While many EU nations do not approve of the idea of an EU led by Germany, the EU itself simply could not survive without Germany, and the determination of the German government to save it. For many Conservatives in the UK such a collapse may be desirable politically, but it remains inescapable that such an event would signal the beginning of an economic disaster within the EU.
Looking at the issue from a UK perspective, in the medium term, if the UK can retain much of its sovereign power with limited fiscal responsibility in Europe, whilst Germany continues to underwrite the eurozone, this should be viewed as a beneficial compromise, and one which should be accepted in order to survive the current economic turmoil.
In the long term, the EU should aim to work closely with Germany, as this strategy will be invaluable in ensuring that when the eurozone emerges from the current crisis, a more realistic, and economically-driven EU, emerges, as opposed to the current political and bureaucratic that the EU is subject to today.
One of the world’s most powerful nations sits patiently at the centre of the eurozone, as both the chief architect and financier of the single currency.
For Germany, the leadership of the EU goes beyond the survival of the eurozone, but also examines its own foreign policy for the last two decades.
Leader of the pack
It cannot be denied that Germany today certainly holds the purse strings.
But this is status is not by pure fluke – it is down to its own austerity measures and prudence. Since the introduction of the Euro, Germany has had the lowest rate of inflation among the major countries, followed closely by France. The highest inflation rates have been in Greece and Spain. While these inflation differentials are not huge, they are large enough to strain a system of fixed exchange rates.
Furthermore, when it comes to productivity, Germany has clearly pulled away from the pack. Partly because of its reforms of its labour market over the last decade, but also because it has been Europe’s powerhouse economy for many decades – achieving vastly higher productivity growth than its neighbours.
As an illustration of this, since 2000, German unit labour costs have risen about 20-30 percent less than unit labour costs in the other EU countries. That gap has left Germany with a large intra-Europe trade surplus. In contrast to this, most other EU nations run at a deficit. The German economy today is the result of very well organised and structured set of policies. Germany has a pivotal influence on the finance and regulation of Europe, strong as it is on issues of global trade and manufacturing.
Germany is solely responsible for managing the European financial crisis, yet it has been highly reluctant to interfere in global situations.
Both the German government and the voters are very much aware of its strength, and appear to be growing sceptical weary of spending taxpayers’ money on bailing out Greece – or indeed of staying in the EU at all. In a recent opinion poll, 46 percent of Germans believed that Germany would be better off without the EU.
Today, Germany knows that its power will continue to derive from soft institutional structures and economic strength, as opposed to an aggressive foreign policy. What the EU nations should recognise, however, is that its current economic clout is focused on the continuation of the EU as a common economic structure.
Having said that, the German authorities are not ignoring public opinion. And that opinion is, on the whole, that the underwriting the rest of Europe’s fiscal and financial woes is a step too far. But Germany, even in hearing the sentiment of its own people, remains dedicated to the European Union. Indeed, Merkel, has recently acknowledged the growing unrest amongst her own electorate, recently addressed public concern by assuring voters that every country is responsible for its own debts.
But Germany still stands as the nation at the forefront to assuage the EU’s financial issues. If the eurozone fails, Germany will need to again restructure its economy and re-define itself on the world stage. If it bears the brunt of the storm it will sit at the heart of one of the most powerful economic bodies in the world.
The long haul
European financial analysts are waiting for the supposed inevitable collapse of the eurozone. They may see this as the end to the continuing woes of the global recession; economic analysts may yet have to wait as Germany’s resolve to see the continuation of the EU seems unerring.
Historically, the EU itself was born out of a great crisis, long before the notion of a unified Europe was conceived. In this vein of achievement and continuation, Germany sees that the crisis within the Eurozone offers the greatest opportunity yet to embed fiscal unity and central control of the European economy within Brussels.
But Germany’s recently-introduced ‘fiscal compact’ plans were largely met with agreement, with 27 of the 29 leaders of the member states accepting the proposals. However, David Cameron’s veto vote cannot have sat comfortably with Germany, and despite reassurance from Angela Merkel that Britain remains a key partner within the Union; the move may be interpreted by many German politicians as another voice of dissent, this time from of the EU’s largest economies.
More than twenty years after German unification restored national sovereignty, Germany remains uncertain of its role within the EU.
Accordingly, some German analysts fear that if the country finds itself both dominant and disliked, it could abandon its pivotal commitment to the EU. It should come as no surprise, therefore, that Germany is reluctant to assume the natural mantle of the leader of the pack.
