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.