Europe’s Winners and Losers

Rarely is a high-flying country brought back down to earth in a single night, but that is precisely what happened to Germany recently. In both football (soccer) and politics, the country had come to embody an unseemly mixture of arrogance and denial. It thought itself the measure of all things European, in terms of both the European championship and the European Union. In both cases, it was deceiving itself.

The same night that Germany was thrashed by the Italians in the championship’s semi-finals, German Chancellor Angela Merkel ran up against the limits of her own powers at the eurozone leaders’ summit in Brussels. Germany’s political course since the beginning of the euro crisis two years ago had left it isolated, and she was no match for an alliance of Italy, Spain, and France.

Indeed, she had no choice but to concede and agree to far-reaching changes to the EU’s new fiscal compact that will ease refinancing of the crisis countries and their banks. The German dogma of “no payments without counter-performance and control” was thus off the table, and the bargain struck in the early hours of the morning was exactly the opposite of what she had wanted. The fiscal compact had been reduced to a shambles even before Germany’s parliament, the Bundestag, approved it later that day.

In terms of addressing the eurozone financial crisis, however, the agreement reached in Brussels was anything but a breakthrough, because it never transcended the logic of narrow crisis management. It offers no strategy for overcoming the crisis in the south of Europe, which means that the threat to the eurozone has not been removed.

Politically, however, the agreement amounts to a small revolution, because it has shifted the balance of power within the eurozone: Germany is strong, but not strong enough to get away with isolating itself completely from Europe’s other major players. Decisions that go against Germany are possible.

There was patent gloating about the German defeat everywhere, only thinly disguised behind strained expressions of solidarity. The full extent of the political damage that Germany’s bailout policy for the eurozone, with its austerity, mass unemployment, and economic depression, has caused in southern Europe remains to be seen.

If Merkel had wanted the agreement reached in Brussels, the outcome would have marked the beginning of a fundamental revision of the eurozone’s crisis policy – and thus an expression of successful statesmanship. Instead, it is a full-blown defeat for Germany, linked to its firm denial that German policy has sharply reduced the country’s influence in the EU. Yet it clearly has: German influence within the European Central Bank has declined significantly; the German finance minister will not become head of the Eurogroup; and now we have the Brussels disaster!

But Germany’s defeat, however widely celebrated, holds much cause for concern. First, not everything that Germany is arguing is wrong: the urgent need for medium-term fiscal consolidation and structural reforms to increase the crisis countries’ competitiveness will not go away. Equally important, however, is the reduction of economic imbalances and European policy coordination to enable growth.

Second, political paranoia is rising on the German right: everybody supposedly just wants Germany’s money; our Anglo-Saxon partners real aim is to weaken us; and the financial markets will not rest until Germany has invested all of its wealth and has thus endangered its economic success. Germany is being “betrayed to foreigners” by the opposition, and “good” productive capital is once again being opposed to “bad” speculative capital. In the opinion pages of some German newspapers, anti-capitalism is returning in a new form, which entails nothing less than a renunciation of Europe and even of the West.

Of course, while the German right threatens to become more nationalistic, history will not repeat itself, because today’s Germany has changed, and so has its political environment. Still, an increasingly Euro-skeptic Germany in the heart of the EU could, given its great economic clout, seriously endanger the European integration process. And, while that would jeopardize Germany’s own interests, practical political action is not always rational, particularly in times of serious crisis.

The same, incidentally, applies to France, except that the French, unlike the Germans, find it difficult to transfer political sovereignty, whereas for us Germans, it is all about the money. Both of these mental/political blocks are threatening the European project in equal measure.

Indeed, if the result of the recent summit means that France and Germany will henceforth each forge alliances against the other, while hiding behind verbal expressions of solidarity, we might just as well forget about Europe. Without a functioning Franco-German axis, the European project cannot succeed.

Both sides will have to decide whether or not they want Europe – that is, full economic and political integration. Economically, they must choose either joint liability and a transfer union or monetary re-nationalization. Politically, the choice is whether to empower a common government and parliament or return to full sovereignty. What we know for certain is that, just as one cannot be a little pregnant, the existing hybrid is not sustainable.

Last November, Volker Kauder, the majority leader in the Bundestag, bragged that “suddenly Europe is speaking German.” He was wrong. Just as Spain (not Germany) remains the benchmark in European football, so Europe speaks broken English at best. From the standpoint of safeguarding the European project, that is all for the better.

© Project Syndicate