A 400-pound gorilla named Germany

Anyone who has followed the evolution of Germany and the European Union for as long as I have may be forgiven for thinking that Germany would always be the EU’s biggest supporter – in more ways than one. But lately, there have been signs that the gradual progression from the old Common Market of the 1960s to the EU and eventually on to a United States of Europe may be a much bumpier road than many once thought.

In the past, German policy regarding the EU reflected Germany’s history and the destruction of Europe caused by Nazi Germany. Along with the rest of Europe, German leaders realized that a unified Europe would help avoid the national conflicts that had so often led to European wars of conquest from ancient times on into the 20th century. In 1952, post-World War II German guilt and common sense led to the establishment of the European Coal and Steel Community (ECSC) by six countries: Belgium, France, Italy, Luxembourg, the Netherlands and West Germany. That modest beginning would lead to the “Common Market” (Treaty of Rome, 1958) and the European Community (EC) in 1967. By 1993, only a few years after German reunification, the 12 EC countries formed the more robust European Union (EU). Today the EU has 27 member states with a total population of about 500 million.

“NATO and EU integration was the model,” says John Kornblum, a former US ambassador to Germany who is now a corporate lawyer in Berlin. “The model is now disappearing and that makes people nervous. We are at the end of a postwar European romance about Europe. Germany doesn’t want to pay for the romance anymore.” – Robert Marquand, CS Monitor, Jan. 30, 2011

Although Germany is the largest country by population and the most powerful economy in the EU, Germany has generally been reluctant to throw its weight around – until recently. As with life in general, the main reason for this is money. Ironically, it is the euro, created in part to unify the EU, that now divides it and lies at the heart of Germany’s new assertiveness within the European Union.

Of the EU’s 27 members, 17 use the euro currency and are part of the euro zone. It is no accident that the European Central Bank (ECB), the central bank for the euro zone, is located in Germany. Germany was reluctant to give up its strong Deutsche Mark (DM), and partly in return for doing so, it insisted on having the ECB located in Germany’s financial capital, Frankfurt am Main. (The ECB’s first president was Dutchman Wim Duisenberg. The current ECB president is Frenchman Jean-Claude Trichet.)

Ever since the first euro coins and banknotes entered circulation on the first day of 2002, Germans and other euro-zone citizens have had a bit of a love-hate relationship with their new currency. But the euro soon zoomed to financial highs against the US dollar and became a strong monetary leader. Even though Germans and Austrians soon dubbed it the “Teuro” (teuer + euro, “expensive euro”) for its perceived inflationary effects, the euro has made it much easier to travel among the countries that use it, and is now a highly respected world currency.

But there is a basic flaw in the euro and the euro zone that only became apparent to most people when, in the wake of the world economic crisis, Greece threatened to burst the euro bubble in late 2009, followed soon by Ireland and Portugal. The euro is a single currency with 17 different economies. There are vast fiscal differences among these 17 nations. A single ECB interest rate can not accurately reflect the needs of Germany’s powerful economy versus Greece’s weak one.

To deal with this at the euro’s onset, member states had to meet strict criteria such as a budget deficit no higher than three percent of GDP, a debt ratio of less than 60 percent of GDP, low inflation, and interest rates close to the EU average. In fact, Greece could not meet those requirements in 1999 before the euro went into circulation, and was excluded until 2001. As it turns out, Greece only gained entry into the euro zone under false pretenses – by cooking its books and concealing the truth about its economic situation. However, all of the euro-zone nations, including Germany, have failed to meet one or more of the various euro requirements at one time or another. The problem is, there is no official penalty for doing so. But there is an unofficial penalty.

“The unified currency was supposed to limit German power. Now the Germans are in charge—and no one is happy, not even the Germans.” – Newsweek, Jan. 23, 2011 (“To rule the euro”)

Prosperous Germany, France and other EU nations have paid a financial penalty for the profligate practices of the poorer euro-zone countries. Chancellor Angela Merkel was only reflecting the opinion of most of her countrymen when she complained about Germany having to bail out countries that had violated the euro’s debt ratio and deficit requirements. At first Germany and some other countries didn’t want to pay, but they soon realized that if Greece were to default, it could bring down the euro and all the euro-zone economies. Merkel: “The euro is in danger… if the euro fails, then Europe fails.”

Despite that, rather than being an EU leader and a strong supporter of European unity, Merkel has been playing more to German sentiments and national interests. Only reluctantly did she agree to support the euro bailouts for Greece, Ireland and Portugal, and a 600 billion-euro contingency fund (European Stability Mechanism) with money from Germany and the other euro states. Some of this go-it-alone German attitude has not worked out well. When Merkel’s government acted unilaterally in May 2010 to impose a ban on naked short-selling (the practice of selling shares without owning or securing to buy them), while also calling for an international tax on financial-market transactions, the euro fell to a four-year low against the dollar.

Although she opposes it herself, voices from Merkel’s coalition partner have suggested that Greece should be allowed to leave the euro zone. “There has to be a possibility for an orderly exit from the euro zone,” said Frank Schäffler of the Free Democratic Party (FDP). Most economists say that scenario would be a disaster for both Greece and the euro. Merkel says a Greek exit from the euro zone isn’t on the table. But it really makes little difference whether Greece goes bankrupt in euros or drachmas. In either case, it would be very messy.

Since the fall of the Berlin Wall, reunited Germany has asserted its own interests more and those of Europe less. The shadows of the German past seem to be fading. Germany is no longer afraid of being seen as the big guy on the block. That is, it’s acting more like a “normal” European country than what Europeans are used to and expect from Europe’s 400-pound gorilla. If it were any other European nation, it would be more accepted, but Germany is the only European nation rich enough to bail out the euro (in part due to the euro itself!). However, the euro zone can’t survive until it finds a way to solve its rich-poor disparity.

I for one would be very unhappy to see the euro fail. That would mean that Europe has failed – along with Germany.

References used:

The New Germany – CSMonitor.com, Jan. 30, 2011

France, Germany Stress Need For Euro-Zone Unity – WSJ.com, May 9, 2011

Germany Tries to Save the Euro – All by Itself – Time, May 21, 2010

To rule the euro zone – Newsweek, Jan. 23, 2011