The Stories Germans Tell Themselves

Things you can hear in Berlin

By  RAYMOND ZHONG

You hear a pretty consistent story about Europe's economic troubles from people in the German capital. Aspects of this story are fair—the cloistered but earnest perspective of a country removed from the worst of the crisis. The rest is self-pleasing bunk.

You hear, for instance, that the crisis originated in Southern countries and is therefore those countries' to solve. The sense of the crisis as somebody else's problem has been palpable in German policy makers' utterances since 2010, but it's worrisome that it persists even in this election year. European governments that haven't been voted away by the economic awfulness have at least had to address it to get re-elected.

Ahead of September's German vote, by contrast, it's hard to find many politicians talking publicly about the euro zone at all. "Germany is on a different planet in this debate," Klaus Deutsch, the head of Deutsche Bank research in Berlin, told me recently.

You also hear in Germany that Berlin can't lead Europe, putting aside the fact that it already does. You hear—or I do at least, in Germany more often than anywhere else in Europe—that the Continent imported its financial woes from the U.S., that America's housing bust is truly and deeply to blame.

You hear that Germany has benefited from the euro, without the slightest acknowledgment that this might be obvious—an export-dependent nation will always benefit from an undervalued currency—and hence a smug thing to say. You hear that Germany has prospered because it sells more than it buys, and because it earns more than it spends.

This last point deserves extra scrutiny. Germany's neo-Victorian obsession with exports would be cause for concern under normal circumstances, but in a currency union it ends up exacerbating other imbalances, as the economist Michael Pettis has argued. German wages grew more slowly than productivity over the last decade, helped along by Gerhard Schröder's labor reforms in 2003-05. This meant Germans consumed vastly less than they produced, fueling an export boom and keeping unemployment low.

But those excess savings had to go somewhere, and with the creation of the euro, they got channeled to the suddenly attractive states of the European periphery. German and French banks invested whole-hog in Greek and Portuguese sovereign bonds, in Irish and Spanish housing markets. The outflow of German capital also meant serious underinvestment at home; Germany's education system, for instance, has languished. By beggaring themselves, the Germans beggared their neighbors.

Which brings us to this fall's Bundestag contest. For the past year at least, it's been nearly impossible to read about the euro zone without encountering the phrase "after the German election." The hope is that after September, Chancellor Angela Merkel's hands will be freer to experiment with electorally unpopular ways to ease the misery around the Mediterranean.

Banish the thought. One Christian Democratic member of the Bundestag told me recently that he'll mention the euro crisis on the campaign trail this summer. "But most of the people don't care about it," he says. "They really don't care."

And when the people don't care about something, their politicians don't bother to challenge each other on it. When the Social Democrats' candidate for chancellor, Peer Steinbrück, addressed the Free University of Berlin earlier this month, he spoke sternly about "the crisis of the monetary union, which is not a crisis of the euro," while reminding the audience that Germany is only strong as part of a strong Europe.

All of it sounded similar enough to the Merkel playbook for one audience member to ask the candidate: "What was actually Social Democratic about your speech?" Mr. Steinbrück's reply: "If a Social Democrat makes a speech, then it's a Social Democratic speech."

Chancellor Merkel is usually hailed as a pragmatic leader, if not a particularly visionary one. Her policy mantra is kleine Schritte, or small steps.

So even in this blithest of German election seasons, the chancellor might take note of certain domestic headwinds. The pendulum seems to be swinging back this year toward growing the incomes of the German middle class instead of mindlessly feeding export industries. The influential IG Metall union, emboldened by the low jobless rate, called for pay increases of 5.5% in 2013; they ended up getting 3.4%. A coalition after September between the Christian Democrats and the Social Democrats—as looks likely—would probably mean renewed efforts to redistribute income via taxes. It might also mean a nationwide minimum wage.

Rising wages and consumption in Germany, whatever their other merits, would hasten the convergence with Southern Europe, where high unemployment continues to eat into unit labor costs. The South is also importing less than it used to from Germany; German GDP growth looks set for a bad summer.

But the big millstone is debt, both public and private, and uncertainty about who will end up footing the losses. I still see no way out for Europe without massive writedowns on the sovereign bonds of at least six euro-zone states—Greece, Ireland, Portugal, Spain, Cyprus and Italy—and a restructuring of household debt in the Netherlands.

Further defaults aren't even under discussion in the German chancellery or the Bundestag, however—not just because they would mean a nasty hit to German taxpayers, but because they are disruptive, not in the German style. Instead Berlin's preferred solution for the South is a long deflationary slog, a rebalancing act that narrows the competitiveness gap but also, perversely, makes existing debt harder to service.

This strategy has a lot to do with the other big story you hear in Germany: that the euro architecture as it existed before 2010 basically worked, that what's important now for the South is simply to catch up on a decade's lost progress. Seen this way, Berlin's vaunted Stabilitätspolitik ends up being a sort of relentless prolongation of the status quo, however brutal the cost.

When I ask German officials these days whether their view of the crisis has changed at all since 2010, their answer is invariably no, not since the first Greek bailout. Once Mrs. Merkel decided that Athens couldn't renounce its debt or abandon the euro, internal disagreement about what to do next basically evaporated.

This "cartel of opinion," as political analyst Jan-Friedrich Kallmorgen calls it, says something about German leadership and politics today. And it's a bad sign for Europe's ability to make the big leaps that are still to come. Most of the time, "small steps" just take you nowhere, slowly.