Berlin—Weimar-era hyperinflation, Prussian thrift, the staggering cost of German unification: These explanations, among others, are regularly trotted out (by outsiders) to explain Germany’s unflinching tight-money policies—at a time when Europe is staring deflation in the eye.
Yet if you ask around in Berlin and Brussels, you’ll get no single answer (and zero allusions to Weimar or Prussia) to the question that so perplexes: Why is Germany so stubborn in its insistence that Greece—and all of Europe—stick to suffocating austerity and restrictive monetary policies when the continent is teetering on the brink of another recession?
After all, German eurozone policy has come under immense criticism from foes and friends, including the French and Italian leaderships, the global financier George Soros and Nobel Prize–winning economists (Joseph Stiglitz among them), as well as American Keynesians like Paul Krugman and the New York Times editorial board. Even European Central Bank director Mario Draghi and much of Europe’s business community agree in essence that Germany’s refusal to create fiscal leeway to ignite growth in Europe could have disastrous implications for the continent’s economy—including Germany’s. There’s no way, economists of different stripes concur, that Greece will ever manage to pay off its €315.5 billion arrears—so why not cut it now, as the Greeks plead for, and open up a path to recovery?
Germany’s disparate critics are hardly of one mind, but most argue for some version of easing monetary policy and employing fiscal stimulus. Germany could raise wages and forgo some of its year-in, year-out record-cracking trade surpluses. Higher wages, for example, would satisfy German trade unions, which have been calling for wage hikes to keep up with prices for years; greater disposable income in German pockets would hopefully increase imports from other EU and eurozone countries—stimulating production in those countries as well as making their exports more competitive with Germany’s on other markets. This would begin to deflate Germany’s trade surpluses without penalizing its entire economy. (The Social Democrats had thought in this direction—until they came to power as partner to the conservative Christian Democratic Union (CDU), led by Chancellor Angela Merkel. Now they timidly follow Merkel’s lead.) As for the deafening why of it all, there is a palette of explanations as to what makes Germany stick so steadfastly to its balanced-budget fetishism.
What makes it all the more odd is that this intransigence is so utterly unlike Merkel, a moderate pragmatist whose usual modus operandi is to chart a middle path if at all possible. But when it comes to stimulating growth in Europe, she has been adamant that Germany’s way is the only way. Nevertheless, Merkel has eventually, grudgingly, given in to bailouts; “haircuts” that trim the Greek debt; banking-sector integration; creation of the European Stability Mechanism, a €500 billion firewall that can disburse emergency funds if needed; increasing EU authority over members’ fiscal policy (including Germany’s); and ECB quantitative-easing measures. And there’s every indication she’ll have to give in again, probably on Eurobonds, namely the pooling of common debt, despite her insistence to the contrary.
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One explanation for Germany’s stance lies precisely in this pattern of strategic retreat, which has reinforced hardline attitudes among the German public. From the beginning, Merkel positioned herself as the voice of “moral hazard,” explains Hans Kundnani of the European Council on Foreign Relations. She read Greece and other affected zone members the riot act: their borrowing and spending was out of control, and they’d have to rein it in, just as Germany had done.
“She was then forced to take steps that she knew were unpopular, such as bailouts, in order to prevent a breakup of the euro,” says Kundnani. “This strengthened the sense among many Germans that they were victims.” When, in the future, Germany takes further steps toward debt mutualization, says Kundnani, the backlash will increase, not least playing into the hands of Germany’s Euroskeptics.
Merkel never made as strong and convincing a case as she could have for saving the euro by helping the debtor countries back to their feet. She could, for example, have underscored how immensely Germany benefits from eurozone trade, the zone’s low interest rates and a currency (the euro) considerably weaker than the deutschmark. Instead, she took the Greeks to task for their ostensibly licentious behavior, using culturally loaded, pejorative language that Germany’s boulevard press quickly picked up on and turned into a campaign against the “lazy,” “spendthrift” Greeks. In doing so, she’s steered herself into a corner that she can’t easily back out of without damaging herself and the government.
This backtracking is even harder now that her Christian Democrats have company on the right, in the form of the Alternative for Germany (AfD), a national populist party that claims the eurozone is taking Germany to the cleaners. The AfD’s leadership is composed of disillusioned conservatives, many economists among them, who resent every centimeter Merkel has conceded for the greater good of the euro, a resentment that has significant (though mostly unspoken) support from the CDU/CSU’s neoliberals and Germany’s banking caste.
The German economist Peter Bofinger, sometimes referred to as the country’s lone Keynesian, told me there’s more than a little old-fashioned free-market ideology to it. “There’s the conviction that there’s too much state and not enough market in the mix. Germany sees itself leading a crusade for balanced budgets, just as it has balanced its own. It wants to export this discipline to the rest of Europe. But this balanced-budget stuff is nonsense—for Germany and certainly for Southern Europe,” he says. “The golden rule of public finance is that running a deficit is OK if it finances investments that will pay off for future generations.”
“There are a lot of people who claim Merkel doesn’t believe in anything,” explains Ulrike Hermann, the economics correspondent of the leftist daily Die Tageszeitung, widely known as taz. “But she ran for chancellor on a pure neoliberal platform in 2005. It was so unpopular that she almost lost, after having led in the polls by double digits. So she’s never tried this again in Germany, but she’s managed to make it the eurozone policy. This is what she really believes in.”
The fact that neither German nor other European voters back these kinds of policies at home, yet the leaderships of Germany, the Netherlands, Austria and Finland force them through on the European level, is a striking example of what is called the EU’s democracy deficit: policy made in backrooms by a handful of member states, which are accountable only to their own electorates.
The German sociologist Erhard Stölting believes Germany’s stance has everything to do with fundamentally different financial traditions in Europe. The balanced budget is an orthodoxy ingrained in Germany’s elite from early on, he says. “This is what the Bundesbank, Germany’s tax authorities and the non–Social Democratic economists all believe: one should borrow only as much money as you can eventually repay. Don’t become over-indebted. German banks are obsessed with not lending too much, fearing bad loans.”
In France and Italy and among Germany’s leftist economists, Stölting argues, there’s a very different culture, a kind of simplified Keynesianism that is at peace with borrowing, accruing debt and then paying it back when inflation has eaten away at it. Countries like Greece, he says, are yet another story, as they’ve never really had much of a bookkeeping culture at all, an inheritance, in part, of their centuries under Ottoman rule.
Bofinger sees the German angst about debt as culturally ingrained, symptomatic of more than just the conservative banking class. In Germany, says Bofinger, debt is considered immoral. “We actually use the same word for ‘debt’ and ‘sin,’ namely Schuld. The Lord’s Prayer contains the phrase, ‘Forgive us our Schuld.’ It’s part of the Protestant ethic; the highest virtue is to save. But Germans don’t seem to understand that if you want to have surpluses, like Germany does in trade, then this requires someone else to have a deficit.”
The French-German EU expert Ulrike Guerot also sees something specifically German about Berlin’s refusal to accept advice from outside. She points to the protagonists in Heinrich von Kleist’s Michael Kohlhaas and Max Frisch’s The Arsonists as archetypes of the sanctimonious, hard-headed German who single-mindedly pursues a quest in defiance of common sense and the community. “It’s all about orthodoxy and not reality,” she says.
“The Germans think they know it all better than everyone else. This harping on Greece and its debt is completely autistic,” Guerot says. “Konrad Adenauer [Germany’s first postwar chancellor] couldn’t have gotten the Wirtschaftswunder [the “economic miracle,” Germany’s rapid recovery in the 1950s from the devastation of World War II] off the ground without the Western powers forgiving large parts of its wartime debt on several occasions. There’s a post-1989 incapacity of the Germans to integrate what other countries think about it into its economic policy. Berlin has to integrate the needs of its European neighbors into its own strategic thinking.”
The Hungarian economist László Andor, the former EU commissioner for employment, social affairs and inclusion, says he’s consistently underwhelmed by macro-economic thinking in Germany, especially when it comes to issues like current-account surplus or inflation. “I think those who are so afraid of inflation today simply don’t understand it that well,” he says.
Andor also believes that the importance of the Schröder reforms is often exaggerated. In 2001, the Social Democratic chancellor Gerhard Schröder launched New Labour–esque reforms that cut welfare benefits, lowered taxes for the better off and revamped laws to make hiring and firing easier. Most Germans are convinced that these policies put the country back on its feet and cut unemployment by more than half. So now, Germans say, France and the Southern Europeans have to do the same.
But, says Andor, other factors, like technological innovation in the German automotive sector, were crucial—and completely independent of labor reforms. German unification had already created downward pressure on wages, and the creation of a supply-chain zone in Central and Eastern Europe turned out to be a big strategic bonus, he says. Yet, Andor also notes, other European countries can learn plenty from the Germans’ competitive prowess, including their superb public employment service and vocational training programs.
Sooner or later, says Andor, Germany will have to look at the eurozone as a whole and try to maximize economic growth and job creation for the entire community. “This is the only way to sustain the single currency and cohesion in Europe,” he says. “This cannot be done if Germany ignores its own enormous current-account surplus and at the same time rules out fiscal transfers in the eurozone.”
Hermann of the taz told me that explanations linking German angst to the past also have at least some validity. Opinion polls, she says, show that Germans are deeply worried about inflation. Moreover, since flag-waving patriotism in Germany has been off-limits until just recently (and still restricted mostly to soccer matches), and full-fledged nationalism is still frowned upon, one safe stand-in for it has been German pride in the strong postwar deutschmark, the rock-solid Bundesbank and the Wirtschaftswunder. “This translates into today’s eurozone policies,” she says. Yet, she notes, while the strong deutschmark was Germany’s recipe for success, the weak drachma was right for Greece’s postwar economy.
Germany’s former foreign minister and longtime Green Party icon Joschka Fischer (who now works as a lobbyist for BMW, Siemens and the conventional energy giant RWE) says spending at home would do Germany some good. “Even Germany, the EU’s biggest economy, faces an enormous need for infrastructure investment,” he wrote recently in the Guardian. “If its government stopped seeing ‘zero new debt’ as the holy grail and instead invested in modernising the country’s transport and municipal infrastructure, and in digitisation of households and industry, the euro—and Europe—would receive a mighty boost. Moreover, a massive public investment programme could be financed at exceptionally low (and, for Germany, conceivably even negative) interest rates.”
In fact, if they so chose, German politicians could add unification to their impressive list of achievements and argue that the same treatment could benefit Greece, whose troubles resemble those of early 1990s’ eastern Germany in many ways. Eastern Germany’s post-unification development is an example that Merkel could hold up to German voters as a long-term spending and investment project—to the tune of €2.5 trillion—that bore fruit, even if it took two decades for it to do so, with many mistakes made along the way.
The sum involved in breathing life into the Greek economy would be less than a tenth of that, estimate finance experts. It can’t and won’t happen, though, unless Merkel and her partners in power are up front with German voters about Germany’s self-interest in maintaining a healthy eurozone economy beyond its own borders. Greece’s default and exit from the common currency—which would endanger the euro project—would be a far rockier and more costly path for Germany and its eurozone peers.