The "German Problem"

We're Good Europeans, Yet They All Hate Us

By Christopher Caldwell

Once again, Europe has a country at its centre that is too big for its neighbours. Merely by keeping on its best behaviour, Germany has managed to reawaken the historic "German problem". It has succeeded its way into a crisis. Ever since Greece's finances became a matter of public concern just over two years ago, Germany has been regaining its status as the leading power in Europe. It subjected itself almost a decade ago to a painful reform of its welfare state and a freeze in real wages that has made it as competitive an exporter as any country in the world, including China. 

Now Germany's economy is better balanced than those of other European countries, its reputation for honest accounting stands higher, and it has kept its triple-A credit rating while France, Austria and others have been downgraded.

Nearly everyone agrees that Germany must save the Mediterranean economies. The Germans propose to do so by lecturing them — posting fiscal commissars in spendthrift ministries, suggesting ways to slash government waste and subjecting the slackers to penalties from the European Court of Justice if they don't comply. The southern European countries see it differently. They propose that Germany solve their problems by paying them.

But German taxpayers are keen to know exactly how much it is going to cost them to bail out Greece and the poorer southern European countries with which Germany is trapped in a common currency. Chancellor Angela Merkel and her ministers say the cost will be zero — Germany is just offering "guarantees", that's all. 

But a brewing populist opposition believes otherwise. Television talk-show hosts warn viewers that the cost will be high. The country's largest circulation tabloid,Bild, greeted Greece's new premier Lucas Papademos last November with the headline, "Will a Euro-Trickster Become Greece's New Prime Minister?" and demanded that German politicians "Bring Our GOLD Back to Germany!" In books with titles like Stop the Euro-Disaster!, The Crash Is Coming, Save Our Money!and The Illegality of the Euro-Rescue, pop economists argue that Germans are wrecking their own country to keep their Mediterranean neighbours in a dolce vita of Porsches, strike pay and retirement at 57. The details of the €206 billion Greek bond "swap" indicate the populists are getting the better of the argument.

The "haircut" agreed for most of Greece's debtors in early March makes it clear that Europe's problem is Germany's problem, too. A haircut is a selective default, and the Frankfurter Allgemeine Zeitung, the country's most influential daily, bluntly pointed out that German taxpayers were among the creditors selected. The newspaper estimated German losses from the plan at €14 billion — about €1,000 for a family of five. That won't break the bank, but it is real money, and most Germans presume it to be only a down payment on Greek, Spanish, Portuguese and Italian liabilities that may stretch into the trillions. When finance minister Wolfgang Schäuble tried to suggest that taxpayers were no longer on the hook, an acerbic columnist at the Frankfurter Allgemeine asked how stupid he thought the taxpayers were.

Germans have been fed a lot of nonsense about the euro. Often they will spout it right back at you. When I asked a Bundestag member last autumn what political benefit Germany had got out of the euro, he replied with an earnest smile, "No Wall. Sixty years of freedom and peace." But the Berlin Wall came down not only before the euro was introduced, but before it was even planned. As for those 60 years of freedom and peace, the currency didn't enter circulation until 57 years after the war. To top it off, my interlocutor was from the former East Germany. 

Outside of the political classes this willingness to consent to polite clichés is hitting its limits. In last September's Transatlantic Trends Survey published by the German Marshall Fund of the US, slightly fewer Germans said they believed the euro had helped the country than hurt it. 

It won't do to exaggerate, of course. Things are going well in Germany itself, especially considering that most Western countries remain in economic peril. Germany's difficulties are imported. The euro tethered non-creditworthy economies with lots of growth potential — such as Ireland, Spain and Greece — to sluggish, predictable, reliable Germany, at a time when Germany was struggling for oxygen under the weight of reunification. In other words, the new currency took a set of rules that were appropriate for an order of cloistered nuns (the Germans) and applied them to a bunch of randy teenagers (the Southerners). 

The result, in the best of cases, was excessive borrowing and a housing boom more excessive than even that of the United States, but minus its reserve currency. In the worst of cases — where political corruption was added, as in Greece — the money didn't even go into anything as real as Spanish beach condos and Irish country clubs. But once their economies collapsed into debt, these countries found themselves without the traditional instrument for exporting their way out of financial messes: devaluation. Some economists had always warned that the euro was being mis-sold to citizens because it had a flaw. Countries cannot share a currency unless they share a government, preferably including a central bank. It turns out those economists were right.

Two solutions are possible. You can adjust the currency to match the government, scrapping the euro and reintroducing the old national currencies. Or you can adjust the government to match the currency, transforming the European Central Bank into a lender of last resort (like the US Fed) and giving Brussels budget-making power over the whole continent. Germans want no part of reforming the ECB — that would mean having prudent countries cover the debts of profligate ones. But Germans are intrigued by the other idea — that of a full-blown fiscal union. In their minds, it will involve nothing more disruptive than inserting punctilious German accountants into ministries in Athens or Lisbon. But they are wrong. Fiscal union means surrendering national budget authority, and a state without authority over its own budget is not a state. Disbanding their nation-states was not the deal the peoples of Europe thought they were making when they consented to "ever-closer union". 

Germany is not pursuing these manoeuvres out of malice. Nor did it design the infernal machine that makes them necessary. The main thrust of European consolidation has always been anti-democratic, whether avowedly or not. But the move away from democracy, sovereignty and accountability has taken on a new élan as Germany has moved to Europe's fore. Let us face squarely the way that Germany's neighbours see its role: Germany re-emerges on to the scene of European power politics for the first time in well over half a century, and its first project — which it pursues with a culpable zeal — is that of depriving various southern European peoples of their statehood.

Wherever democratic forms have been flouted, Germany has been a pivotal actor. Last summer, Italy's elected (remember that word) prime minister, Silvio Berlusconi, agreed to a fiscal consolidation package in exchange for the ECB purchasing some of Italy's €2 trillion in outstanding debt. Once his financing was secured, he reneged. It was a dastardly trick, one for which Italians should have held Berlusconi accountable. Instead, Germans held Berlusconi accountable. In November, Merkel intervened with the Italian president, Giorgio Napolitano, who appointed Mario Monti a senator-for-life (perhaps the most famous holder of that title since General Augusto Pinochet of Chile) and presented him to Italians as their take-it-or-leave-it next premier. Monti is a first-rate economist and a gifted politician. Colleagues praise his work as EU competition commissioner. But the peripheral question of whether the  unelected Monti is a better person than Berlusconi should not distract us from the primary question, which is Italian sovereignty.

At roughly the same time, European leaders presented Greek prime minister George Papandreou with a new austerity plan. Given that it would bind his countrymen for at least a generation and that no credible economist gave it any chance of working, Papandreou proposed putting it to a referendum. At that point, Nicolas Sarkozy, the French president, and Angela Merkel — speaking as the leaders of individual nations, not as representatives of the eurozone — offered Greece the choice between replacing Papandreou or getting kicked out of the euro family. Greece buckled. In mid-February, the German finance minister Wolfgang Schäuble suggested in a radio interview that Greece cancel its elections, due in April, and install a technocratic government on the Italian model instead. 

"This is all a German racket designed to take over the whole of Europe," said one politician. "I'm not against giving up sovereignty in principle, but not to this lot. You might just as well give it to  Adolf Hitler, frankly." As it happens, that was the late British trade    secretary Nicholas Ridley, assessing the likely consequences of monetary union in the Spectator interview that ended his career in 1990. But his worries find an echo in the assessment of today's Greek politicians. As the conservative George Karatzaferis said in February, "We could do without the German boot." 

The Federal Republic of Germany — as it was set up by the occupying powers, and particularly the United States, after the Second World War — was intended to deliver Germany a maximum of political and economic stability. Germany got political stability through a democratic constitution that made a priority of the balance of powers, no matter how inefficient it proved. Germany got economic stability through hard money. That meant putting monetary policy in the hands of an institution — the Bundesbank — protected from democratic vicissitudes. The contradiction could easily be finessed as long as Germany's fate was ultimately in the hands of the occupying powers. 

But with Germany changing from Europe's ward to Europe's leader, the system has lost its equipoise. Chancellor Merkel shows a great deal of reverence towards the institutions that grew up under the Bundesrepublik. She even refers properly to today's Germany as the Bundesrepublik. (As a matter of constitutional law, the two Germanys did not "unite" after 1989; the Communist East was admitted to the free West.) Better than any other politician Merkel melds the old and the new. She is the last protégée of Helmut Kohl, the German chancellor who reunified the country and agreed to share a currency with European neighbours. And she is the first East German leader of the Christian Democrats, the archetypally West German party founded by Konrad Adenauer. 

"What people like about her here," one finance ministry aide told me, "is just what they dislike abroad." The word almost everyone uses to describe Merkel is "souverän", a hard-to-translate term that can mean poised and self-sufficient but can also mean smug and snotty. For the most part, it is a positive description. 

Critics of chancellor Merkel claim either that she has lost the feel for democracy or that she never had one to begin with. A common subtext is that you wouldn't expect her to, either, coming as she does from East Germany. For Gesine Schwan, a former Social Democratic presidential candidate, Mrs Merkel has an antipathy to contentiousness and back-and-forth and has depoliticised German life. Ms Schwan is an electoral foe, but misgivings are also beginning to be felt in the chancellor's own party. 

In a particularly ugly incident over the winter, one of her aides, Roland Pofalla, confronted Wolfgang Bosbach, a party loyalist of many years' standing who had misgivings about the latest instalment in the Greek bailout fund, and told him, "I'm sick of looking at your face and listening to your shit." Such stories have been more common in Washington and Westminster than in Bonn or Berlin. By the time I spoke to Bosbach, he had thought a good deal about the implications of the bailouts for democracy. "It may well be that people don't understand every last detail about the Greek budget and the situation on the financial markets," he said. But they have a keen grasp of how successful the rescue measures are likely to be. And up till now, at any rate, the sceptics have been vindicated." 

True, the common currency trapped certain European countries in a fixed exchange rate with Germany, so that they could continue to afford to buy German products. But this appeared to be an advantage for which Germany would eventually have to compensate its Mediterranean neighbours in cash.

How economically strong is Germany? At one of the low points in the collapse of the Greek economy last autumn, the interest rate on Germany's six-month bonds fell to 0.08 per cent. People were paying Germany to hold on to their money. That is strong. On the other hand, Germany had some of its feeblest bond auctions ever over the same period, sales where the Bundesbank had to pick up government debt no investors would take. And Germany's government debt stood at just over 80 per cent of GDP. That is weak. Other countries treated Germany as if it were strong enough to bankroll others' debts, but not so strong that it should have much of a say in how that was done. 

Germany is in a predicament. On the one hand, it wants to show itself a good European partner, just as it did throughout the Kohl era. Europe's ruling elites insist on it. On the other hand, Germany cannot surrender its veto over changes in its economic policy. It cannot submit to a eurobond, or any pooling of debt that would allow the southern European countries to make free with Germany's money. And not just because Germany would suffer economically.

If the German government was to accept eurobonds, it would alienate three important constituencies. First, of course, are the voters, for reasons that go without saying. Second are the economists. Not only the supermarket-carousel economists with their neon-coloured paperbacks full of exclamation points, but also the orthodox university economists and the central bankers. Third is the German constitutional court. In the early days of the Greek crisis  certain measures were passed by regulatory authority. But the court ruled last autumn that only the federal parliament, the Bundestag, has the constitutional authority to send Germany's money to Greece, not the chancellor or her ministers, or any hand-picked Bundestag "special committee" either. The court wanted to ensure that the economic benefits of the euro, such as they were, cannot be turned into costs for its democracy.  

Nonetheless, if the history of European consolidation offers a single hard-and-fast rule, it is that all conflicts, no matter who is on what side, are resolved in favour of Brussels. A betting man would expect Germany to consent eventually to a common European debt instrument. A look at Mrs Merkel's dealings in the bailouts will show why.

Last summer the magazine Der Spiegel ran a feature alleging that Kohl had said of his successor, "Die macht mir mein Europa kaputt." ("She's wrecking my Europe.") Kohl denied the words but not the substance, and his attack has been cited by both friends and foes of Mrs Merkel as a turning point in her dealing with the euro. It certainly shows what a difficult hand she has to play. 

Finance minister Wolfgang Schäuble was Kohl's most loyal deputy, a man who had been considered his almost inevitable successor until he was shot by a psychopath and partially paralysed in 1990. He has been assigned the job of squaring the circle — reconciling Germany's economic with its political interests. On the one hand, Schäuble is a dedicated — one could almost say abject — believer in the ideals of the European Union. There is a certain type of eurocrat who believes the EU is entitled to collect Germany's debt to humanity on humanity's behalf, and Schäuble is the German politician such people would find most sympathetic. You would never hear him complain, as Kohl's Social Democratic successor Gerhard Schröder did in the 1990s, that Brussels had "frittered away" good German money.

On the other hand, Schäuble's view of economics is roughly in line with German orthodoxy. When I visited the finance ministry in 2010 I was told, "You won't find many Keynesians here," and the minister's philosophy has become more solidly grounded as the crisis has endured. (An aide who was present at Schäuble's meetings with George Osborne in London last October was struck by the similarities in the two ministers' economic philosophies. Both have absorbed the lessons laid out in Carmen Reinhart and Kenneth Rogoff's history of financial crises, This Time Is Different, and both believe in "Ricardian equivalence", the idea that trying to stimulate an economy with borrowed money can backfire because people will store money away to pay for inevitable tax hikes. So negotiations over the bailouts have been a schizophrenic affair for Schäuble — a war between his willingness to give the store away diplomatically and his unwillingness to move an inch economically. But the two sides, as we have said, are not evenly matched. The early stages of German negotiations with Europe were marked by an opposition to eurobonds in fact — to any kind of shared responsibility for the southern countries' debt. But especially after Kohl's pronouncement last summer, and after europhile members of the CDU, notably Jürgen Ruttgers and Elmar Brok from North Rhine Westphalia, challenged Merkel and Schäuble internally, there has been a subtle shift. Germany now objects to eurobonds in name, but has shown itself amenable to taking responsibility for others' debts. 

This is Merkel's compromise. Germany is in a position where it is going to haemorrhage either cash or sovereignty. The government has decided it would rather haemorrhage sovereignty. Voters will notice it less. They get to accumulate money in the short term. The EU gets to accumulate sovereignty in the long term. Everyone is happy. But the arrangement is tenable only so long as it costs taxpayers no money. The assumption on which it is based is challenged by the Greek bailout and default deal.

There are plenty of people who would like to see Germany bound more closely into a European government. Ulrike Guérot, a political analyst with the European Council on Foreign Relations, professed herself delighted when Angela Merkel promised to campaign for Nicolas Sarkozy in his bid to be re-elected France's president. (Merkel was reportedly infuriated when Sarkozy's Socialist opponent, François Hollande, threatened to renegotiate the European treaties negotiated in Brussels in December, the ones David Cameron initially blocked.) Guérot described as "completely out-dated" the notion that Merkel is infringing on France's sovereign space by claiming a role in choosing its leader. This is a natural function of the transfer of political power from a national to a continental level, she believes, the sign of the Europeanisation of politics. 

But not all Germans view matters in quite the same way. There are signs of a desire for more radical change. Two years ago, the race to elect Germany's largely ceremonial president, usually a humdrum affair, turned into a national obsession. Joachim Gauck, an anti-Communist Lutheran pastor and former East German dissident who has curated the files of the Stasi, roused the passions of Left and Right and nearly upset the former CDU governor Christian Wulff, chancellor Merkel's handpicked candidate. Wulff won only because Die Linke — the Left party, successor to the East German Communists — refused to support Gauck.

Gauck's supporters, however, will get their wish. Wulff had to resign in February when it was revealed that he had accepted free vacations. Gauck was elected as president in March with the support of all parties except Die Linke. It nominated Beate Klarsfeld, the Nazi-hunting activist and advocate for Holocaust memory.

This was a coup on the part of Die Linke, since their great blunder of the last two years — aside from blocking Gauck — was to give qualified support to the Turkish flotilla trying to break the Israeli blockade of Gaza. No German party until then had set itself up in opposition to Israeli foreign policy, and voters were uncomfortable when Die Linke did. If nominating Ms Klarsfeld was meant to induce public amnesia, however, it didn't quite work. The Frankfurter Allgemeinerevealed that Ms Klarsfeld, at the time of a protest against West Germany chancellor Kurt Georg Kiesinger in the 1960s, during which she berated him for his Nazi past, had collected 2,000DM from the East German leadership, considerably more riddled with ex-Nazis than the West German one.

Germany is experiencing more political tumult now than you would expect from perhaps the world's most successful major economy. The country is clearly moving left. Last winter, residents in Stuttgart became incensed over the wrecking of their city's historic train station to make way for a €4-billion commercial centre. They rallied behind a Green candidate who ousted the Christian Democrats from the governorship of Baden Württemberg for the first time in almost 60 years. Chancellor Merkel can read the writing on the wall. Her coalition partners, the free-market FDP, have collapsed — they no longer win enough votes to qualify for state parliaments anywhere they run and she must now audition a new cast of coalition partners. The Social Democrats, with whom she shared power to the satisfaction of the public between 2005 and 2009, appear most likely to get the role. At her party's convention in Leipzig in November, Merkel rallied her members behind a minimum wage, and she has agreed to close all the country's nuclear power plants within the next decade. Observers speak of a "Social Democratisation" of the CDU. 

But some are planning for a future in which voters will not be satisfied with a mere change of minority party in the ruling coalition. Gerhard Schick, a Bundestag member who is the finance spokesman of the Greens, believes that inequalities of wealth and income must be dealt with post-haste. He notes that the vision of the Occupy movement — of a world divided between the "99 per cent" and the "1 per cent" — resonates in Germany. "When people hear, ‘We benefit from the euro'," he says, "they ask, ‘Well, who's benefiting at the moment? The upper 1 per cent or maybe the upper 10 per cent, but not me.'" The Greens have proposed a levy on property. Similarly confiscatory taxation ideas have sent French presidential candidate François Hollande rocketing in the polls. 

That is one reason why the most likely source of a disruptive movement in Germany is on the anti-capitalist Left. For the first time, Die Linke has an orator of great brilliance — Sahra Wagenknecht. A former philosophy student from Jena and the party's deputy chairman, Ms Wagenknecht has attracted gossip recently for her "close friendship" with the former Social Democratic candidate for chancellor, Oskar Lafontaine, the most prominent West German leftist to migrate to Die Linke, which he led until 2009. He is 69; she is 42. Deeply read in Marxist economics, she has written almost a dozen books. She may be the most impressive figure in her party.

In her office, where an old print of Marx and an Italian Madonna hang on the wall behind her desk, she assails dumping, "the unfair competition that is incompatible with democracy", the "arrogance" and "ignorance of German history" that has prompted the government to put German "savings kommissars" in the government offices of Greece. However, in a way that is reminiscent of the Front de Gauche presidential candidate in France, Jean-Luc Mélenchon, Sahra Wagenknecht's policy platform doesn't add up. She favours nationalising all kinds of industries, but she is also more European than she lets on — so the outcome of her programme would be a lot of nationalised industries with no nation to own them. 

While her barnstorming speeches still remind some of the Communist heroine Rosa Luxemburg, she says all of this without raising her voice. Wagenknecht is worth watching because she shows signs of wanting to soften her image as a humourless and over-disciplined party comrade. If she manages that, she will be formidable. She has spoken on TV shows about her upbringing in East Germany, after her Iranian father left her mother. Her latest book tries to link her own Marxist economics with the mainstream West German "Ordoliberal" school of Walter Eucken, Ludwig Erhard and others who designed the postwar German welfare state. "They, too, saw that economic power can be uncontrollable," she says.

What is most unlikely is that Germany will see a right-wing populist movement of the sort that has proved disruptive in Finland, France, Sweden and Switzerland recently. Populism requires an anti-European component, which Germany certainly possesses, but it also seems to require a hostility to mass migration and multiculturalism. While Germany is dissatisfied with multiculturalism, the history of the last century is still too firmly stamped on the minds of most citizens for hostility to play a role in any such discussion. The attempt two years ago of the Berlin parliamentarian René Stadtkewicz to start an Islamosceptic party has not met with much success, even though he had the support of leading European populists such as Geert Wilders of the Dutch Freedom Party and Oskar Freysinger of the Swiss People's Party.

But there is another difference, and it does not argue in favour of the country's remaining quiescent for long. In most European countries it is quite well understood that the fiscal union now being discussed is merely another name for the disbanding of nations. This disbanding has a particular poignancy in Germany's case. Germany has spent the last 65 years trying to earn its way back into the company of civilised nations. It is hard to believe that its citizens will be content to demolish the political civilisation they have so painstakingly rebuilt with decades of blood, toil, sweat and tears. The most important innovation of the European Union, the pooling of sovereignties, is turning out to be the most dangerous. Decided on at a time when Europe's strongest nation had no sovereignty to speak of, it must now be implemented at a time when it has more than its share.