Europe in Crisis, Part III: The German Engine

by Jerome Roos on March 10, 2011

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As the dark clouds of austerity amass over the European continent, the EU’s economic powerhouse — Germany — still finds itself standing tall in the eye of the storm. But while the German economy ploughs on, concerns in Europe are rising about the country’s growing influence within the Union, as well as the increasingly isolationist stance of Merkel’s government and the protracted frictions in the Franco-German relationship. How can Europe address the challenges it confronts while its largest member state appears to be going it alone?

Originally published at Breakthrough Europe.

Europe in Crisis, Part I: The Age of Austerity
Europe in Crisis, Part II: China to the Rescue?
Europe in Crisis, Part III: The German Engine
Europe in Crisis, Part IV: The Brussels Behemoth
Europe in Crisis, Part V: The Death of Liberalism
Europe in Crisis, Part VI: The Future of Europe

There’s an elephant in the room of European politics today. While few policymakers are ready to admit it in public, the Franco-German axis — for sixty years at the very heart of the European project – lies in shambles. As the EU’s painfully slow response to the Greek debt crisis amply demonstrated, the Union now suffers from a profound lack of credible leadership.

In the wake of Germany’s second Wirtschaftswunder and its recent political ascendency, the French have largely lost their intra-European hegemony. At the same time, Merkel’s government is increasingly falling prey to isolationist conservative tendencies. In the process, the EU appears to be drifting aimlessly towards the abyss of its own political and economic self-destruction.

As of yet, few observers seem to grasp the gravity of the matter. If our leaders fail to find a way to confront the growing influence and isolationism of its largest and most powerful member state, the consequences for the functioning of the EU will be profound. From climate action to fiscal policy, we will need to radically change tack to avert irreversible damage to the dream of a united Europe.

The Rift over the Rhine: From Economic Engine to Political Einzelgänger

In his famous 1946 speech on the United States of Europe, Winston Churchill rightly observed that “the first step in the re-creation of the European Family must be a partnership between France and Germany.” In 1950, his words crystallized into the so-called Schuman Plan, a proposal by the foreign minister of France — the German-born Robert Schuman — to pool together sovereignty over the most important sources of military and industrial might of the modern nation state: coal and steel.

Ever since the creation of the European Coal and Steel Community in 1951, the strength of the Franco-German axis has been the watermark of the success of the European project. This project now finds itself in a profound political, economic and environmental crisis. Not surprisingly, this crisis has coincided with — or rather, brought to the surface — a deep rift in Franco-German relations, not in the least part driven by a long-term divergence in the countries’ economic performances.

Just last year, the Economist praised Germany for “weathering the recession” in such remarkable fashion. While all of Europe seemed to be imploding amidst the Eurozone debt crisis, Germany registered a neat 3.3 percent growth rate. France and the UK both got stuck at a sluggish 1.6 percent, while Italy grew a petty 1.1 percent and the Spanish economy actually contracted 0.4 percent.

This, combined with Germany’s solid fiscal position and its geographical proximity to the recently integrated former East bloc, has helped to finally tip the balance of Europe’s political scales towards the Eastern side of the Rhine. Hence Germany was in the position to deliberately delay action on the Greek debt crisis for months while Sarkozy and the rest of Europe were desperately pleading for rapid action.

Similarly, Germany’s traditional hegemony over European monetary policy has allowed it to continuously shoot down “a decades-long French project,” namely the creation of a European economic government, which could prevent future crises by addressing the structural imbalances within the Eurozone and directing money towards innovation and competitiveness in the hamstrung South.

Increasingly, the German engine has been displaying a worrisome tendency to go it alone. And as Larry Elliot of the Guardian observed, the European debt crisis has now put Germany firmly in the driving seat of the eurozone’s financial and economic policy.

The Protestant Ethic and the Spirit of Neoliberalism

As the International Herald Tribune recently reported, Merkel and Sarkozy “are the best hope Europe has for continued unity. But they do not like each other at all.” In more ways than one, it seems that the personal frictions between Merkel and Sarkozy stem from a much more profound set of differences between their respective countries, cultures and worldviews.

Merkel, who holds a doctorate in physics, is in many ways the embodiment of the German cliché: an unemotional rational technocrat with a preference for a structured, legalistic approach to policymaking. Sarkozy, on the other hand, full of machismo and grandeur, embodies a more impulsive aspirational politics, hinging on France’s passionate penchant for ambitious state-led projects.

The neoliberalism of Merkel — replete with its emphasis on wage repression, high savings and a lifelong fear of inflation — corresponds neatly to what Max Weber called The Protestant Ethic and the Spirit of Capitalism, or the idea that hard work and abstinence will lead to worldly salvation. Merkel’s protestant and scientific rationalism sets her light years apart from her impatient Gaullist counterpart.

Under Sarkozy, centralized France seeks to recreate a strong centralized Europe in its own image. Under Merkel, federal Germany seeks a more decentralized state-based approach of voluntary cooperation. As France continues to decline relative to its booming neighbor, the prime driver behind European integration is being weakened by the day.

The Soft Mercantilism behind Merkel’s Liberal Mask

In the process, we are witnessing a resurgence of what we could call ‘soft mercantilism’: a form of submerged economic nationalism embedded within an inclusive, liberal discourse replete with allusions to Europhilia and fiscal, social and ecological responsibility. By publicly calling for European solutions while quietly benefiting from a grossly undervalued currency and systematically repressed wages, Merkel is perhaps today’s most gifted practitioner of this new European doublespeak.

But once again, the Greek debt crisis revealed plenty of skeletons in Merkel’s closet. Before forcing a ruthless structural adjustment package onto the Greek people, Merkel deliberately delayed action on the escalating debt crisis, causing the Euro to tumble — which ‘incidentally’ happened to be great for German exports, by the way — and Greece to sink ever deeper into the abyss of global capital markets.

Intent on placating conservative constituencies in anticipation of upcoming local elections, Merkel’s government largely kept silent while Bild — Germany’s largest newspaper and anincreasingly powerful political force on the populist right — splurged downright racist headlinesonto its front pages. In the end, Merkel only acted when it dawned on her that a looming Greek default would cripple Germany’s heavily exposed banks, which had greedily bought up Greek bonds in the lead-up to the crisis.

But currency manipulation and the extortion of the European periphery are just the tip of the iceberg. As we have reported before, another mercantilist tool has been the EU Emissions Trading Scheme, which has seen billions of euros in subsidies channeled towards some of Germany’s most carbon-intensive industries. Little does Merkel seem to care about the fact that the introduction of the ETS actually triggered a ‘dash for coal‘ — as long as the German engine keeps on running!

From Gaullist Aspiration to Neoliberal Targets and Timetables

All of this clearly has profound consequences for Europe’s efforts to deal with the two greatest challenges of our time: climate change and the Great Recession. The French call for European solutions and state-led economic transformation is simply being outclassed by Germany’s focus on national sovereignty, market-led solutions and ‘rational’ targets and timetables.

As a result, Germany’s ascendency is increasingly pushing out the aspirational politics of Churchill and De Gaulle, replacing it with a cold technocratic incrementalism that promotesemissions reductions targets as the principle means of addressing climate change, and debt-cutting timetables as the overarching strategy to avert financial collapse.

The German Constitution, for example, obliges Merkel to “wipe out structural deficits by 2016.” Merkel, for all her talk about national sovereignty, wants to institutionalize similar budget targets at the European level. Given how many times these budget targets have been flaunted in the past, including by Germany itself, Merkel’s adherence to the timetable philosophy amounts to nothing more than magical thinking.

Here, the parallel with the German approach to climate policy is uncanny. At Copenhagen, Merkel — one of the staunchest defenders of the Kyoto approach — shamelessly sought to force her emissions targets and timetables onto China and India. Now she is trying to deal with the debt crisis in a similar way, by forcing targets and timetables onto the so-called ‘PIGS’ — Portugal, Ireland, Greece, and Spain — only this time around she wants these countries to cut their deficits, rather than their emissions.

But even if the Chinese and the Greeks were to stick to Merkel’s emissions and deficit targets, the price in human dignity and well-being would be far too high to justify the potential gains. It seems that a state-led alternative to debt restructuring and energy transformation is greatly preferable to Germany’s neoliberal project. In fact, at this pace, even Germany itself will eventually fail to stick to its targets.

As Felix Hüfner, head of the German desk at the OECD, has pointed out, “Germany’s recent success is based much more on price competitiveness through low wages than quality, and that is a pattern that can’t be maintained going forward.” How, then, can we prevent the Iron Chancellor from getting her way and leading Europe towards the abyss of its own self-destruction?

Rebuilding the Bridges over the Rhine

In these times of crisis, Europe is in desperate need of political leadership. While we have traditionally relied on the Franco-German tandem to pull the project forward, the special relationship is no longer one between equal partners, and the alliance itself can no longer be taken for granted. So what can Europe do to prevent Germany from becoming an inward-looking Einzelgänger?

As Churchill emphasized in that same great speech, “there can be no revival of Europe without a spiritually great France and a spiritually great Germany.” The revival of French and German greatness must be at the heart of Europe’s recovery. The meek, calculative rationalists in the Brussels bureaucracy have been a major agent in promoting Merkel’s technocratic timetable philosophy. Their neoliberal ideology will have to make way for a new aspirational politics.

At the same time, we have to find a way to combine the French penchant for state-sanctioned grandeur — think of the TGV, Channel Tunnel, Milau Viaduct and the ‘nuclear wonder’ — with Germany’s unrivaled dynamism and technical efficiency — consider the strength of German solar and wind industries and the nation’s advanced manufacturing prowess. To move forward, we do not need to change either France or Germany — rather, we should integrate the best of both worlds.

After all, without Germany, Europe would probably turn into a sclerotic statist monster. But without France, it could turn into a dynamic market economy that nevertheless fails to bring clean energy and the European periphery into orbit. The true greatness of Europe will therefore never be unearthed until the contradictions between Germany and France are sublated into a complementary European whole.

The German Engine and the French Rudder?

What if we supplemented the great German engine with a solid French rudder? What if we harnessed the power of the market and of Germany’s successful industries, and directed this immense potential towards the wholesale transformation of Europe’s industrial and financial economy — in the same way that the French transformed their energy sector in the 1970s and 1980s?

Then, perhaps, we could get a vessel capable of braving even the roughest of seas. Then, perhaps, our continent would no longer have to drift aimlessly towards the abyss. Then, finally, we would be able to rise to the task and meet the greatest challenges of our time. As one integrated whole.

But what would such an integrated ‘whole’ look like? What kind of repair will be needed to our present configuration in order to bring it into practice? And what is Churchill’s ‘spiritual greatness’ anyway? Can it even be attained within the confines of today’s globalized and financialized economy, where monetization and bureaucratization are the order of the day?

These are some of the questions we will take up in the next article in this series.

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