Eurozone crisis will never be resolved until Berlin faces up to the fact it – and its export surplus – are the cause of the problem
I AM a Germanophile. Germany is the cradle of modern science – of Einstein, Heisenberg and Planck. It gave us the literature of Goethe and Schiller, Mann and Grass. The mind-stretching philosophy of Kant, Leibniz, Habermas and, yes, Marx. The music of Bach and Beethoven, and even of Stockhausen and Tangerine Dream. Our modern culture is filled with positive German influences: Bauhaus design, the cinema of Fassbinder, the art of Ernst and Beuys. Against all this, Hitler is an Austrian house painter and Kaiser Wilhelm a delusional thug.
However, it has to be said that the present European monetary crisis was minted in Germany, and is being made worse by Angela Merkel’s myopic policy direction. Because of that, today’s over-hyped EU summit is likely to end in failure. Worse, it is likely to cause the unravelling of the benign, integrationist “European project” that has dominated our political lives since 1945 – with more than a littler help from equally myopic Little Englanders.
To make sense of today’s deliberations in Brussels, we need to understand the roots of the euro crisis. The culprit is not Greece, though Athens borrowed insanely to fund the 2004 Olympics. The culprit is not Ireland, which actually was one of the most fiscally conservative countries in Europe until 2008, when Dublin was daft enough to guarantee the unknown debts of its banking system. Germany and France promptly took advantage of Ireland’s naïve European solidarity by stiffing the Irish taxpayer with huge interest charges for the subsequent bailout.
The roots of the present crisis lie in Berlin’s massive and permanent export surplus – a surplus secured by the existence of the euro itself. You can’t have an export surplus without other countries running import deficits. And countries with a permanent trade deficit can’t go on buying German imports without massive borrowing. That is the origin of the European sovereign debt crisis and it can’t be resolved until Berlin politicians tell the German public to buy more foreign goods. Which is never.
Germany keeps its export lead inside the EU because the exchange rates at which eurozone members initially joined the common currency made German goods cheap. Now those countries (eg Greece) can’t devalue to boost exports. (I admit it helps that German engineering products are good, and that in the run-up to the creation of the euro, Berlin used an influx of skilled workers from the old, Communist GDR to slash wage costs.)
Outside Europe, Germany also gains from having the euro. If there were a return to the Deutsche mark, foreign investors would consider Germany a “safe haven” for their money. That would send the exchange rate of any Deutsche mark sky high, making Germany’s exports ultra expensive. No wonder Merkel is desperate to “save” the euro, even if it means bailing out those pesky Greeks.
The existence of a eurozone configured to German interests explains Berlin’s attitude to currency reform – trying to keep everything as it is. First, Chancellor Merkel has systematically refused to allow the European Central Bank (ECB) to act as a lender of last resort to eurozone governments who can’t raise cash in the bond markets. With a central bank guarantee, private lenders know they will always get their money back, so they go on lending. No guarantee, no loans – hence the crisis.
Why is Merkel being so bloody obstinate? Partly because ordinary German taxpayers fear the ECB would print euros like wallpaper and cause a return to the hyperinflation of the 1920s. This fear is exaggerated, by the way: printing euros would suck in Chinese plasma screens before it put up prices.
Merkel’s other reason for blocking greater intervention by the ECB has to do with Berlin’s fear the central bank might become too politicised. There are sound and laudable historical reasons why Merkel wants an independent ECB. But when your house is burning down, it is no time to worry about the colour of the fire engine. Instead, in Brussels, with an unhappy Nicolas Sarkozy in tow, Merkel is proposing a giant leap forward in European fiscal integration. The aim: to make everyone behave better, so everything can stay exactly the same. Preferably this would encompass the whole 27-member EU, but more realistically the 17 eurozone countries – what Merkel dubs, ironically, the “coalition of the willing”.
This fix would see the budgets of eurozone countries policed (before being submitted to national parliaments) by the rest of the eurozone; i.e. Berlin and junior partner Paris. Penalties for breaking the rules would be automatic unless a majority said otherwise – unlikely, given Germany’s share of the votes. Frankly, this is never going to happen. For starters, even if this deal were successful, it would only fossilise the inbuilt, structural trade imbalance at the heart of the eurozone. Sadly, Berlin does not see this because of its own natural self-interest.
Second, the loss of sovereignty inherent in this proposal will not be acceptable in many parts of the eurozone, never mind the whole EU27. Even the Spinelli Group, the main cheerleader for a federal Europe, has denounced today’s Merkel-Sarkozy plan as a “coup d’état” because it will divide rather than unite.
Third, far from creating stability, the plan will wreak havoc in the bond markets, which will immediately attack those who do not form part of the new financial union. Perhaps Berlin is counting on this threat to whip laggards into line. More likely, market turbulance will intensify, followed by recession, strikes and Greece et al exiting the eurozone.
I do not accuse modern Germany of any crude plot to take over Europe. But Berlin’s long journey to atone for Hitler has led German politicians down a very parochial path. Suddenly, when we need European leadership they are still thinking about protecting their own economic parish and pretending it is something greater. Until Berlin realises it is part of the problem, this crisis cannot be resolved.