Three Barriers Prevent Germany From Saving Europe

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IN JUNE 1963 John Kennedy brought hope to a divided city at the frontline of the cold war with the words “Ich bin ein Berliner”. When Barack Obama visits Berlin next week, half a century later, he will find it a very different place. United, strong and rich, Germany is Europe’s hegemonic power. France, the other half of the partnership at the European Union’s core, is weak and badly led; Britain is distracted by a debate about its EU membership. Nothing can happen in the EU without the active support of Germany’s chancellor, Angela Merkel.

Mrs Merkel is Europe’s most impressive politician. Many times, during the past five difficult years, she has used her power for good. But she is a naturally cautious woman who faces a potentially tight election in September. And, as our special report makes clear, her reluctance to lead Europe is widely shared by her compatriots.

As a result, Europe is drifting towards disaster. Although markets are calmer than last year, euro-zone GDP is shrinking, unemployment is over 12%, progress on building the structures needed for a stable currency area has stalled and faith in the European project is ebbing away. Unless Germany stirs itself, the continent’s economy—and its politics—will get worse.

History and all that

Three barriers block Germany taking on that leadership—all understandable ones. The first and hardest to surmount is historical. Even the word for leader, Führer, conjures up terrible memories. Having twice plunged Europe into war, many Germans believe their country’s duty is to be a bigger version of Switzerland: economically prosperous, politically modest.

But these days the danger for Europe lies not in too much German leadership, but too little—something even Poland’s foreign minister has publicly pointed out. And taking a back seat is not an option. As the euro zone’s biggest creditor, Germany has most to lose if the euro collapses. Across southern Europe austerity policies are associated with Mrs Merkel. Support for the EU is, as a result, crumbling: a recent Pew survey found that 60% of Spaniards, 75% of Italians, 78% of Greeks and even 77% of the French believe that European integration has harmed their economies. If the euro falls apart, Germany will be held responsible.

The second reason for Germany’s reluctance to lead is the belief that the ultimate cause of the euro-zone crisis is the laziness of southern Europeans, and that if only they were as productive as Germans none of this would have happened. The solution, on this view, is for the rest of Europe to become as hard-working and fiscally prudent as Germany.

There is some truth in this. Over the past ten years unit labour costs in Germany have risen by only 5%, compared with 21% in Italy. Germany undertook painful structural reforms that the southern Europeans never seriously attempted. Spain is finally buckling down, but Italy is still failing to implement many of the reforms it needs and France remains in denial: last weekend François Hollande, its president, blithely announced that the euro crisis was over.

Yet this moralistic view is based on a selective reading of history. Germany is expecting southern Europe to reform at a time of austerity, but when Germany undertook its reforms in 2003 it broke the euro’s budget-deficit rules. And Germany’s recent success owes a lot to the cheapness of the euro, which has allowed its exports to boom. What is more, many of the loans that enabled the southern Europeans to spend extravagantly were made by German banks, which are among the main beneficiaries of German-financed bail-outs.

Nor is Germany’s economy as robust as it might appear. In recent years it has undertaken virtually no growth-enhancing reforms. Thanks to a quixotic energy policy, the power bills of its households are 40% higher than the EU average. And it boasts the oldest population in Europe. Over the next ten years its workforce will shrink by some 6.5m, the equivalent of all the workers in Bavaria. Germany badly needs a successful Europe not just as a noble project or an act of charity, but for its own economic future.

Mrs Merkel’s third reason for failing to lead is tactical. Germany, goes the argument, will get more done if it guides from the rear. With hostility growing around Europe, too much Teutonic assertiveness will be counter-productive. Moreover, moral hazard is a problem. If Germany seems ready to open its wallet, its southern neighbours will be less willing to change.

Those risks certainly exist, but Germany’s current foot-dragging poses larger dangers. The patience of the unemployed masses in southern Europe is not infinite. The continents’ banks are still shaky. Incrementalism and delay still threaten the single currency’s very survival.

Beware zombies

Germany is right to want to push slack southerners to reform. But greater competitiveness will not, by itself, get the peripheral economies going again. The more wages and prices are squeezed, the harder it is for weak countries to repay their debts. Fiscal austerity has now been relaxed, grudgingly. But a host of pro-growth reforms could be pushed by a more animated Mrs Merkel. She should create a broader European Transformation Fund, to encourage privatisation and boost public and private investment in southern Europe. She could champion a full single market for services. She could do more to spur investment inside Germany.

On the architecture of a new Europe, Germany has been even weaker. If the euro zone is to work, it needs a proper banking union. Germany is holding back the measures needed to introduce one, but zombie banks could condemn countries to years of stagnation: just ask the Japanese. The longer that goes on, the greater the risk of eventual euro break-up. If Germany were to take the lead and build a more cohesive euro zone, it could break this vicious spiral.

When American leadership shored up a vulnerable West Germany half a century ago, it was in the interests not just of Germans but of Americans too. Now it is Germany’s turn to lead its weaker allies, for their sakes and for its own.

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