Germany: The key problem of the EU crisis?

By Viktor Sukup

In the endless Greek crisis and the recipes supposedly designed to overcome it, Germany—whose Chancellor began by imposing the IMF’s participation—is the main hardliner pretending to “have the “Eurozone rules respected”. Many Germans, and others, view Greece as the sole responsible party of the eternal crisis and the ever-repeated European “summits of last hope”. But whatever the roots of the country’s debt problem and the construction errors of the Eurozone, Germany’s role is essential in the Greek breakdown since 2010: contraction of over 25% of Greece’s GDP, still soaring foreign debt, unemployment rate of over 50% for young people, who are leaving their devastated country en masse, all of which will certainly be aggravated by the inglorious 13 July “compromise”. Germany is also hardly the brilliant example generally described by mainstream comments, and maybe the key problem of today’s European (dis)Union…

European integration has brought progress, but did not eliminate an important divide which exists basically along the borders of the Roman Empire: “a confrontation of two mentalities which should be complementary” between “two Europes which have been searching for centuries, uneasily, for a cultural unity which they still have not realized”, wrote a Spanish author 30 years ago.

But a currency union needs monetary and economic coherence, strict rules and discipline, in order to function satisfactorily. Many governments of the Eurozone seem to have not understood that basic truth, as even France and Germany broke those rules.

Anyway, the South became notably more “equal” to the core members of West European integration, in terms of GDP per capita and, partially, with respect to industrial development and infrastructures. Further steps forward seemed therefore logical. But a currency union needs monetary and economic coherence, strict rules and discipline, in order to function satisfactorily. Many governments of the Eurozone seem to have not understood that basic truth, as even France and Germany broke those rules. This was particularly the case of Greece which certainly should not have joined the Eurozone and then accumulated, fueled from outside, a huge foreign debt.

Germany can be right in defending the usefulness of its past reforms, or at least some of them, and in emphasizing that its high competitiveness in relation to countries like China should also be welcomed for the entire EU. Why should Germany be criticized for its higher efficiency, which contributes greatly to avoid the entire block’s fall into irrelevance in terms of international competitiveness? Also, the trade balance includes the whole value of the products, but the value chain is extended across many national borders, and therefore, a car “made in Germany” includes a large part of value added in other countries, so German exports also benefit them directly…

We see indeed very strong points like industrial innovation, vocational training, the workers’ participation in the management of large industrial companies, efficient R&D efforts realized even by SMEs, and a well-functioning federal system with relatively limited corruption. There are also the different “enterprise culture” and unionism of the “Rhine model of capitalism,” as opposed to the Anglo-Saxon variety obsessed with the short-term and financial benefits. But there are important weak points, such as very low public investment in recent years, a cause of great inconvenience such as chronic traffic jams in the country’s motorways. And it should not be forgotten that the 1953 international debt conference in London condoned a large part of the huge German debt and that, while its environmental policies and technological progress can be welcomed, Germany’s carmaker lobby sabotages stricter pollution standards and its industrial development has a high cost for Europe’s environment.

In the Eurozone, Germany kept its salaries and prices down while the Southern countries let their own rise too much, causing a rapid loss of competitiveness and a rising external deficit. The affluence of credits from northern, especially German and French, banks fueled this evolution: irresponsible lenders met irresponsible debtors, particularly Greece with its traditions of corruption, clientelism and inefficiency…

Whatever the roots of the crisis, the EU policy towards Greece since 2010, largely formulated by Germany, is a disastrous social, political and economic failure: the whole EU might be heading to disintegration.

“In 2010, the Greek state became insolvent”, writes Yanis Varoufakis. “Two options consistent with continuing membership of the Eurozone presented themselves: the sensible one, that any decent banker would recommend—restructuring the debt and reforming the economy; and the toxic option—extending new loans to a bankrupt entity while pretending that it remains solvent. Official Europe chose the second option, putting the bailing out of French and German banks exposed to Greek public debt above Greece’s socioeconomic viability (…). Keen to avoid confessing to parliaments that taxpayers would have to pay again for the banks by means of unsustainable new loans, EU officials presented the Greek state’s insolvency as a problem of illiquidity, and justified the ‘bailout’ as a case of ‘solidarity’ with the Greeks”.

Whatever the roots of the crisis, the EU policy towards Greece since 2010, largely formulated by Germany, is a disastrous social, political and economic failure: the whole EU might be heading to disintegration. It aggravated the crisis and the North-South divide, transforming a “dream” of unity into a nightmare of disunity. “Europe’s future (is) in Greece’s hands”, says a cover of The Economist, and handling the crisis is the biggest dilemma for Ms. Merkel in her decade-long position as head of the German government.

As former Italian center-right Prime Minister Mario Monti thinks, it is urgent to “build bridges” between institutions and populations, between the North and the South, combining the “fiscal consolidation” objective with the “development of public investments in order to aid the countries to return to economic growth and to avoid the surge of populism …” Another expert concludes that “the reforms don’t work without growth. And (…) the lack of growth deteriorates the growth potential, especially through long-term unemployment. Not only does the supply not create its own demand, but the lack of demand generates lack of supply”. There is also a massive brain drain leaving the “PIGS” with few highly-educated young people and, therefore, a disastrous mortgage on their future; all this makes the narrative of “successful austerity recipes” in countries like Spain difficult to believe…

EU policy based on blind austerity, creating an authentic “lost generation”, important authors say, is suicidal for Europe and irrational for genuine “Northern” long-term interests.

The euro’s problems have many causes, but finance, “Brussels” and Germany appear clearly as the main culprits of the never-ending crisis, which might only be resolved by a very different policy combination of reforms, productive investments all across the EU and a measure of intra-EU North-South solidarity. So Greece could become an important place for Europe’s vital oil and gas import transit and for promoting renewable energies like solar and wind power, by way of offering new profits to German enterprises, which have already benefitted enormously from the euro…

The “toxic option” mentioned by Varoufakis and the corresponding “solidarity” presented Greece with the difficult choice between “Schrecken ohne Ende” and “Ende mit Schrecken”: a continued hell of punishments for past sins or an end of its sufferings in the straitjacket of troika recipes, leaving it for another certainly difficult and unknown future. It has often been said that without the euro the EU and its member states would be in an even worse situation. Its introduction was a logical step forward, but it was ill-prepared, as a premature element of the “European Dream” which Jeremy Rifkin rightly praised as a kind of example a decade ago. But would not Greece or Portugal, and even others, be in a better shape today if they had not participated blindly in this adventure? Can we ignore that Argentina, after breaking in 2002 a similar straitjacket which had thrown it into the worst crisis of its history, had then a row of very successful years? According to one pro-European analyst, it should be better now to abandon the euro before it is too late, in order to save the EU itself from breaking up. Markets were united without considering the heavy social and economic costs for the citizens, destroying much of the progress of previous decades, when economic integration was combined with a measure of political coincidence and social progress among all countries. But the EU policy based on blind austerity, creating an authentic “lost generation”, important authors say, is suicidal for Europe and irrational for genuine “Northern” long-term interests. As one of the most outspoken EU-critical prominent economists underlines, there are many recent “economic catastrophes” in Northern countries like Finland and the Netherlands, which are basically a result of the Eurozone austerity recipes.

So Germany is certainly a big problem because its government, and the EU on which it exercises a powerful influence, insists on clearly failed recipes. This Berlin-Brussels consensus suffers some erosion—in France and Italy, in particular, putting a heavy strain on the vital Franco-German “axis”— but hardly in Germany, where a majority advocates Greece’s euro, and maybe EU, exit, and where high-level Social Democratic Party (SPD) leaders also took particularly hawkish positions. As Germany is the major player, it obviously should rethink constructively its role, but the EU must also try to better accommodate Germany, in order for the Union to continue to play a role on the world stage.

As prominent liberal French MEP and high-level specialist of European affairs Sylvie Goulard warned, “It is essential that Germany, with all that it has to offer to Europe and gain from it, does not end up isolating itself” by imposing its supposedly superior model and the decisions of its Bundestag and of its Constitutional Court upon the other member states. It is true that democracy means, above all, respecting national Parliaments and Constitutions, and in the absence of any “European demos” it is difficult to launch more democratic, more solidarity-driven and more rational politics…

“In just one weekend,” writes the German weekly news magazine Der Spiegel, “70 years of German postwar diplomacy was ruined.”

Summing up, European—and particularly German—stubbornness, lack of vision and even ignorance of basic economics have already had disastrous consequences for Greece. The Eurozone “compromise” of July 13, celebrated as the only way to avoid a “Grexit”, more closely resembles the infamous “diktat” of Versailles, rightly criticized by Keynes, than an agreement among allies, and it has certainly not brought an end to the crisis, maybe even a sort of “coup d’état”, as the objective seems to be the downfall of the Greek government. Fortunately, there are even some opposing German voices, such as the important weekly Der Spiegel, which writes that in just one weekend, 70 years of German postwar diplomacy was ruined… For Krugman it’s “a grotesque betrayal of everything the European project was supposed to stand for”. Anyway, now the Eurozone taxpayers will also have to pay for the many-years-long and persisting blindness—or cynicism—of their leaders. The main culprits of the Greek debt crisis in 2009 were obvious, but future historians will also have little doubt about who is to blame for the Greece-and-euro-related European mess of 2015. As French historian Emmanuel Todd warns, we might be heading, in fact, towards a third European self-destruction under German leadership…

 

Viktor-Sukup-e1425939296816-284x300Viktor Sukup is an analyst of European and international affairs and regional integration. He is a former professor of international economy at the University of Buenos Aires and a European Commission official from 2000 to 2012. He is the author ofEuropa y la globalización”, written in Buenos Aires in 1998. He is also a member of the Board of Directors of the Club of Rome/Brussels.

 

 


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