international analysis and commentary

Germany as Europe’s hegemon by default

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Eight years after the outbreak of the crisis that has shaken the euro and proven to be the biggest challenge for the future of the European Union, Berlin has become what might be called the unwilling hegemon by default in Europe. In recent years, it has largely defined the budget policies of the eurozone as well as the inter-governmental process that led to the establishment of the European Stability Mechanism: the basic rules of the currency union were basically set by Germany.

However, one of the prices paid for the common currency and the EU institutional framework’s stabilization is a deepening divide between lending and debtor countries; and between northern, eastern and southern members of the eurozone. These divides have been emphasized recently by an ideological struggle over the right political and economic tools necessary for a sustainable and fair stabilization of the eurozone.

International opinion makers and political elites generally blame Angela Merkel’s Germany for the enduring European crisis or for the long-term imbalances caused by its strong export oriented economy – sometimes for both. The struggle has peaked in the dramatic six months which followed the election of the left-wing coalition in Greece. The Tsipras government, initially supported – more or less officially – by several EU governments as well as by other non-European countries (from Russia to the United States), was elected on the promise to put an end to austerity, with the ambition to change the tide not only in Greece and thus eventually break Germany’s rule maker position.

But the Greek government and its sponsors seemed to fail: the six months of talks ended with Berlin demonstrating an unprecedented degree of unwillingness to compromise. During the summit of the Euro Finance Ministers of July 12-13, German Finance Minister Wolfgang Schäuble even presented a position paper where he proposed that Athens either vastly improve its bailout-linked reform plan or take a five-year “time-out” from the eurozone.

This move seemed to offer the best argument for those who argue that resurgent German economic nationalism is ultimately the real threat to Europe and to the common currency. Berlin, so the argument goes, is striving to aggressively forge a “German Europe” rather than keeping on the path of a tranquil “European Germany”. Yet both the critics of austerity and of Berlin’s role in Europe fundamentally miss two elements: the profound Europeanism of the current German political class and the changed geopolitical reality on the continent. This leads many to misunderstand the real nature of de facto German leadership of Europe.

A few months before his proposal for a Greek “time-out” from the euro, Schäuble, a convinced Europeanist, published an article in the Frankfurter Allgemeine Zeitung on Bismarck’s legacy for Germany. Angela Merkel is in fact accused of imitating the policy pursued in the second half of the 19th century by the so-called “Iron Chancellor”. Schäuble decisively refused any attempt to establish such an analogy and denied any hegemonic ambition or nationalistic instinct. As proof, he cited the fact that nationalist and xenophobic isolationism, which is spreading for example in France and in the UK, is absent in Germany.

More recently, Germany´s bold decision to open up its frontiers to Syrian refugees has coincided with a wave of spontaneous solidarity with incoming migrants and earned worldwide respect and praise. The German decision was not completely selfless and its far-reaching, potentially explosive consequences will impact Germany and Europe for years to come. However, Berlin has proven that, if needed, German leadership can be prompt, resolute and humane and that the country is able to develop its own “soft power”.

Nevertheless, in Schäuble’s analysis a truly integrated Europe can only be built by consensus and compromise between all the member states and no country can dictate or impose a common policy. This widely shared view encourages the German political elite to always attempt to balance national and European interests.

The German public opinion is well aware of this: what from the outside seems to be a pure and simple diktat by the strongest country on key economic policy issues, is increasingly perceived by Germans as a sell-off of national welfare. International criticism has paradoxically increased this perception. The political elite is worried that it could result in a credibility crisis of the national party and parliamentary system, as the opposition of Bundestag CDU/CSU members to the last Greek bailout vote and the uncertain position of the SPD have shown.

Besides this backdrop of increasing pressure, the Greek question has forced the German political elite to take note that not only the supranational European institutions have proven highly inefficient in coping with the crisis – unless they undergo a deep change – and that Germany is the only country with sufficient means to lead the needed shift.  However, this will neither happen by general consensus, as Schäuble hoped and as Merkel may still hope, nor by adopting macroeconomic policies inspired by neo-Keynesian monetarism, as hypocritically suggested by several international observers.

This brings us to the second, more geopolitical element: austerity is not the reason why the economic performance of EU members has dramatically drifted apart. The deeper problem is the acceleration of a long-term process: socio-political and economic cleavage between Germany and at least two key countries of the eurozone, i.e. France and Italy. While Germany may have acted ruthlessly in reforming its economic model through a mix of social reforms, cooperative industrial relations and expanding production base, both France and Italy have not managed to compete or match Germany’s growing power and clout in the formulation of EU policies.

Indeed Paris and Rome did not propose new and credible macroeconomic approaches as an alternative to the German model; they stuck to an investment pattern based on state spending, which has proven unsustainable by the crisis. Meanwhile, Berlin’s geo-economic position has acted as a magnet for Eastern Europe, the Benelux, and the Baltics and to some extent for Northern Italy, in the absence of credible counterbalancing forces at the western and southern rims of Europe. The “German question” is then somehow back. To capture the current conundrum, the old maxim from the Bismarck era is still valid: Europe – certainly Paris and Rome – is too weak for Germany’s strength.

In fact, in the decade before the crisis, the elites of both countries have lost momentum as political, cultural and economic alternatives to Germany; their economies now suffer from structural weaknesses or – in some regions – chronic underdevelopment. This, matched by the French rejection of the European constitution, and by Paris’ political will to keep the formal balance with Germany in the reformed voting system in the Council of the European Union in advance of by the over-hasted Eastern enlargement, have put an end to the original model of European integration centred on the Brussels institutions and based on Jacques Delors’s functionalist approach.

Hence, France and Italy’s economic weakness and short-sighted politics have de facto ended up creating a wide gap with Germany. The unintended new “leader by default” is not aiming at imposing a unilateral transformation of the continent, but is increasingly able and willing to defend its perceived national interest- much more effectively than its fellow EU members. Against this backdrop, Germany was truly in need of strong continental partners to enforce its leadership by consensus in the eurozone and in the EU, beyond the support of the small northern and eastern European partners.

Internal and external pressures could push Berlin to seek a rapprochement with London, to directly negotiate a new economic and institutional relationship between the EU and the UK. Or else, Germany could start considering the European project only as a means and not as an end in itself, and the euro as a reversible arrangement. The end of the single currency would hit Germany hard and the effects on its economy would be dramatic. But even more dramatic would be the effect on countries such as Italy and France.