Angela Merkel once told the French President: "Nicolas, you will have to get used to the fact that I am slow". As the rest of Europe soon learned, Merkel is not prone to exaggeration. Uncertainty, prevarication and finger-pointing have dominated Europe’s ham-fisted approach to the crisis engulfing it.
The conflagration in the eurozone has profound implications for the wider European Union since significant political capital was invested in the creation of the single currency. Much of the European integration project is now staked on its success. Merkel’s prescient remark that "if the euro fails, then Europe will fail", is, again, no overstatement.
Initially limited to Greece, the crisis could have been contained with swift action to prevent a disorderly default and contagion to other rickety European neighbours. Alas, it took several months of fraught negotiations and market jitters to approve the first rescue package in May 2010, forever undermining the markets’ confidence in the eurozone’s crisis resolution mechanisms. What crisis resolution mechanisms, one may ask. Indeed, the "no bail-out" clause was firmly enshrined in the Maastricht Treaty in 1992 and no lender of last resort was ever designated, a role that has slowly fallen to the European Central Bank (ECB). However the monetary financing of debt is anathema to German policy-makers, who argue that that the burden of adjustment should fall on the eurozone members who pursued a spendthrift fiscal policy. Germany has consistently rejected any notion that it should address its own internal imbalances, such as its excessive current account surplus and low domestic consumption, as a means of resolving the crisis. "Economically, there is a perception that exporting is not a very bad thing as long as Germany isn’t doing it", said Steffen Kampter, parliamentary secretary to Germany’s minister of finance.
He has a point. Since reunification Germany clamped down on wages so that unit labour costs fell by an annual average of 1.4% from 2000-08, a significantly higher rate than America and other European neighbours. Thanks to its sound economic policies Germany’s share of exports in its GDP gained 25 percentage points from 1993 to 2008. It is easy to see why Germans are loath to see their country’s surplus lambasted as a source of imbalance within the eurozone. "If one is more competitive than others, then others have to become more competitive", continues Kampeter.
Germany’s success, however, owes much to the bedevilled single currency. Its exports became cheaper than they would have been under its treasured D-Mark as the euro reflected Europe’s competitiveness, not just Germany’s. The European Commission has estimated that the euro was around 10-12 percent undervalued for Germany in the first quarter of 2009. Furthermore, almost half of Germany’s exports go to its eurozone neighbours. Germany may be right in arguing that the rest of Europe ought to play catch up rather than force it to shift down a gear, but the message falls on rather hostile ears when bail-outs are accompanied by draconian austerity measures that have perpetuated Greece’s gruelling recession for five years. "There is frustration with Germany, [it] is moving ahead, but what are they doing for the rest of Europe?" says André Sapir, a senior fellow at Bruegel, a think tank.
German preponderance in Europe is not a novelty. Germany has outshone the continent since the 1980s, when the mark’s strength caused strains in the European Monetary System. As such, the Economic and Monetary Union project was born out of a desire to liberate other European countries from the dominant monetary policy of the Bundesbank. The current crisis is reminiscent of that situation, both because of the ECB until recently pursuing a rather conservative monetary policy which harmed heavily indebted countries, and because Germany’s deep pockets mean it calls all the shots. In the words of Tommaso Padoa-Schioppa, "German leadership of Europe is a fact, ignoring this would be the wrong way for Berlin to exercise its leadership."
Merkel seems to have grasped this, albeit belatedly, and has embraced her de facto leadership with the quasi-scientific meticulousness that characterises her political method. As Guy Verhofstadt, a former Belgian prime minister, once remarked, "she likes incremental steps, she has no vision for Europe." Germany’s skewed economic prowess may have been one of the factors at the heart of Europe’s travails, but with foreign assets worth some 6 trillion euros, consisting mostly of claims on eurozone members, Germany would be no winner in a break-up of the euro. In fact, the stress tests on European banks in 2010 revealed just how exposed Germany’s feckless banks were to Greek debt, which largely helps explain the reversal of Merkel’s position towards a Greek bail-out. Saving the eurozone was synonymous with saving the German banking system from collapse.
Wolfgang Münchau wrote in The Financial Times that "with unification, Germany has become too large to be an ordinary European state, yet not large enough to be a superpower", thus neatly encapsulating the difficult relationship between Europe and Germany. The latter’s overbearing economic strength is part of the problem, but by failing to translate economic might into political leverage it has allowed the crisis to fester and the idea of Europe, esoteric though it may be for many voters, to fade into oblivion. Instead of rallying Europe around the vision that has guided the integration process hitherto, a harmful chasm between fiscal saints and sinners has been allowed to take root. Merkel has concentrated on demanding trenchant reforms in embattled countries and more intrusion on national sovereignty with the latest "fiscal compact", whilst dogmatically refusing to concede anything in return. Any attempts to set up Eurobonds as the sine qua non of increased budgetary surveillance have been stymied. If she is to emerge as a successful leader of the beleaguered old continent, she must bring out her "conductor’s baton". A concrete plan to restore growth and competitiveness in Europe which does not rely solely on self-perpetuating austerity would be a good start. Bring on the Merkel Plan.
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