The European Council on Foreign Relations

Berlin (and New York) view: Sarrazin in America

Date: 29th May 2012  |  Author: Ulrike Guérot,

Categories: Euro Crisis, Germany in Europe, Reinventing Europe,
Tags: , euro crisis, euro crisis , eurobonds, greece , greece, merkel, merkel , sarrazin, euro crisis, euro crisis

I don’t know whether the controversial German political writer Thilo Sarrazin plans to roll out his new book “Deutschland braucht den euro nicht” ('Germany doesn't the euro') in the United States, especially in New York, but he would probably not find anybody in the whole investment banker crowd this town has to offer who would understand him. If there is one - just one - argument here, it is that Germany has so visibly, so obviously and so largely benefitted from the euro. Investment bankers are shaking their heads about one question that drives them: “Why doesn't Merkel get it?” This is the new German question. What they mean by that is that the euro needs some sort of fiscal federalism, Eurobonds, a treasury and the ECB as lender of last resort. Everybody recognises this. So what is Merkel waiting for?

Germany, after the benefits of the euro, now also benefits from the crisis: It is “Krisenprofiteur” seen from the outside. Calculations say that Germany has been saving – in conservative estimates – something like €15-20 billion (if not up to €30 billion) – because of the extreme low or negative interests rates on its bonds: only 1.54% for 10 year bonds. Germany’s economy is 25% better off than some 5 years ago, not despite the crisis, but because of the crisis. In addition, the crisis keeps the euro exchange rate relatively low, which is good for Germany's export industries. All in all, it is possible to estimate that Germany has benefitted from the crisis by as much as €100 billion. This is perhaps, cynically speaking, why Germany currently does everything to make the crisis last: simply because it suits the country so well.

The only ones who do not see it that way are the Germans, and this is where it starts to be dangerous. How could Germany move itself into such autism; how could the German viewpoint on both the origins of the crisis and the possible ways to get out of it become so disconnected from the international viewpoint? Germany is absolutely isolated (see Obama’s reaction at the recent G-8), and, scrolling through the German press, the only ones who don’t even notice their own isolation are again the Germans. Sarrazin, should he come to New York with his book about not needing the euro, would surely be considered some kind of lunatic!

The financial world also doesn’t understand why BILD-Zeitung rings the inflation-alarm at 2.1%, ignoring the fact that the ECB has outperformed the Bundesbank on inflation rates for a decade. The irony of history might well be that inflation becomes a self-fulfilling policy: because the political landscape (and the Constitutional Court) in Germany does not allow workable solutions for the euro (especially Eurobonds), the ECB will need to go in by default.

Standard opinion in the financial world is that Germany has decided to dismiss standard understandings of macroeconomics. The hottest concern is whether Europe will be able to issue a common guarantee for deposits of all European banks to avoid a bank run in the South. Ireland, Greece, Portugal, Italy and Spain alone hold €5.5 billion in deposits & savings, and, should the situation in Greece come off the rails around the elections, a deposit guarantee is what Europe would need most. Germany will not be amused, but it will have no choice. If this does not happen, there would be huge outflows to the dollar and the yen, and the euro may lose its status as a world reserve currency. One of the biggest achievements of the euro would be… gone.

Why, for two years now, has Germany not used its vast political advantage to attempt to get ahead of the situation, rather than end up being chased by both markets and public opinion? Today’s question for Germany is whether it has the geo-strategic far-sightedness to shape a transnational European democracy which, using the euro as a political tool, would lead a strong Europe into the 21^st century. But this question has gone under in the caterwauling about Sarrazin, whose biggest weakness is to dismiss any political framing for his book.

Wolfgang Schäuble, on the contrary, has just laid out in his Karlspreis-speech how this could work: direct election of the EU president who would become the nucleus for a European executive; a fully fledged two chamber system with the EP as pro-rata parliament which would also get the right of (legislative) initiative, and a proportionally digressive second chamber composed of national parliaments; and finally a Commission, where each EU country no longer sends a Commissioner. This means de facto creating a European Republic, as it would mean (partially) abandoning the principle of national representation. Schäuble’s proposal, however, is the answer to Europe’s democratic deficit, which has been described most prominently by Larry Siedentop and Andrew Moravcsik, and which the Greeks have painfully experienced (as they have been told since last month that they can always vote but have no choice as to how). This is Colin Crouch’s argument of Post-Democracy: a democracy which is hollowed out. It is time that Europe gets back to a real European democracy, not only because it was invented here, but also because democracy is eroding on a world scale, where ever more autocratic regimes use the efficiency argument against it.

Harvard Professor Amatya Sen made the case in this week's NYT that the EU cannot hand over budget decisions to technocrats and then, when experts dictate disastrous policies, wonder why voters revolt. Budget decisions are the noblest right of a parliament and should remain there. The answer can thus only be a different parliamentary setup in Europe. Even the Economist, the least romantic journal with respect to Europe, came up this week with the conclusion that either Europe accepts (a little) more federalism - starting with a common deposit guarantee - or it most likely will break up. Hopefully, Angela Merkel reads it!

I wish Germany were the intellectual incubator and (together with France!) promoter of a European Republic, and vault itself up to become Europe’s benevolent hegemon, combining leadership and generosity with economic strength and merging German economic power with European political resonance. This would be a nice mission civilisatrice for Germany, restoring its culture and grandeur that it spoiled last century, precisely because it turned German culture against the others and didn’t levee Europe!  

Instead, Germany seems to be reducing itself to a mercantile and servile nation of salesmen who, in denial of their culture and their responsibly of history, prefer to be a big Switzerland and dream of becoming a BRIC’s bride. The European Republic, even if it were German-dominated in its institutional set-up (a direct election of the president would favor Germany as much as a pro-rata EP), would probably still be accepted by Germany’s neighbours, as long as they can trust the lasting commitment of Germany to Europe. A more German Europe in exchange for a definitely European Germany that does not seek to keep a bolt-hole open to escape, that’s the deal to strike: Eurobonds would precisely be the expression of this!

Such a vision of a European Republic, however, would mean that Germany understands that benevolent hegemony comes together with generosity, not with hardness! Second, it would require macroeconomic understanding that money is essentially political and the euro a political vehicle (and never has been anything else); and thirdly, it would need a strategic vision. Germany, as of today, has none of the three on offer! It may therefore miss its most important rendezvous with world history! There should be no doubt: if the euro and with it Europe screws up in an uncontrolled and perhaps even unintended disintegration moment, the history books will not point to cheating Greeks. They will blame... Germany! Sarrazin may argue in Chapter 8 of his book that history no longer counts. But he is simply wrong! Being in denial of history may make Germany loop its future!

This means, with CDU deputies arguing that saving the euro cuts budgets for German towns and communalitie thanks to the supposed €47 billion cost of Eurobonds, that this strategic vision is not in reach, and not even on the horizon. Germany is currently drowning itself in a provincial glass of water, where it could – and should – build a European empire!