In Europe, new fears of German might



BERLIN — For decades, Germany's role in Europe has been to supply the cash, not the leadership. With fresh memories of war, the continent was cautious about German domination — and so were the Germans themselves.

But the economic crisis has shaken Europe's postwar model, and Germany increasingly calls the shots. As countries struggle to pay their debts, only Chancellor Angela Merkel has enough money to haul them out of trouble. And the price Merkel is demanding — more control over how they run their economies — is setting off alarm bells in capitals across the continent.

In Athens, protesters dressed up as Nazis routinely prowl the streets, an allusion to the old model of an assertive Germany. In Poland, accusations that Germany has imperial ambitions became a campaign issue in the recent presidential election.

And although German leaders have sought in recent weeks to soothe others' fears in advance of high-level meetings in Brussels on Sunday and in coming days, the tone has sometimes sounded pugilistic.

"The question of who could accept a German model has been settled by the market," said a spokesman for German Finance Minister Wolfgang Schaeuble. "We are really only talking about the details and the extent of the measures, not about their nature."

At $3 trillion in 2010, Germany's economy is now half again as large as those of its nearest rivals, Britain and France. Its banks are far less exposed to Greek debt than those in France, insulating it from the effects of a possible Greek default. It has thus far committed $290 billion to a European bailout fund for Greece, Portugal, Ireland and anyone else who needs it — significantly more than any other nation in Europe.

Misgivings about a larger German role in Europe have been apparent inside the country, as well, with Merkel facing tough debates about the extent to which the country should commit its money to helping others. And the rest of Europe remains cautious about taking German medicine, needing the help but worried about the side effects.

"That's the predicament of leadership," said Joschka Fischer, a former foreign minister who has urged Merkel to do more to support the euro. "When Germany acts, there is the fear that Germany will dominate. If Germany doesn't act, it's the fear that Germany will withdraw from Europe."

Drawn into the euro zone

For nearly a half-century after World War II, West Germany operated out of the limelight, content to be an industrial power while leaving the politics to France, which didn't have the same legacy of using force to get its way. If West Germany wanted something to happen on the continent, it whispered to its Gallic neighbor and let the proposal be presented jointly. Even the location of the rump state's capital, in sleepy Bonn near the border with Belgium, symbolized a European orientation.

But when the Berlin Wall fell in 1989, Germany, long split between rival Eastern and Western blocs, announced plans to reunite, raising fears that a powerful nation at the heart of Western Europe would once again tower over its weaker neighbors. As a condition of French consent to the reunification, French President Francois Mitterrand demanded a steep price: that Germany give up its cherished stable currency, the deutsche mark, and bind itself to a common currency, and by extension to the broader tapestry of Europe.

That worked for years. But time and circumstance are conspiring to put Germany in the driver's seat. Continental powers including France and Italy have faded in influence, while inside Germany the long caution about being assertive has mostly worn out. The German flag, long regarded with suspicion even inside Germany as a symbol of nationalistic pride, now flutters more and more across the country.

Pushed toward leadership

Until now, Germany has occupied a middle ground — critics would say it has shirked leadership — in addressing the economic problems that have gripped Europe for the past two years. Amid crises in Greece, Ireland and Portugal, Germany has resisted picking up the bill, and it has not articulated a clear vision for how to avoid the problems in the future.

In the long run, though, experts say that Merkel has little leeway to turn away from Europe, even though that course might be popular with some German voters. Germany makes its money by manufacturing high-quality products and industrial machinery that it then sells outside of its borders, so its success depends on those around it. A recession in the rest of Europe would quickly hit it, too.

At the highest levels of the chancellery, there is a sense that now is the time for grand plans, and Merkel this month called for far-reaching changes intended to impose greater economic policy coordination among the 17 countries that share the euro. A change could take years to take effect, but a first step could come at the G-20 meeting of world leaders Nov. 3.

Germany "has been in a constant reactive role," said Fredrik Erixon, head of the European Center for International Political Economy, a Brussels think tank. Now, though, it "is at a place where it can largely dictate what it wants to see in other countries, and they have to go along with it."

If embraced by Merkel's fellow European leaders, the proposal probably will push the euro zone in a more German direction, a model that enforces low inflation, small deficits and strict curbs on borrowing. France appears likely to go along with this approach, at a time when its own dicey finances weaken its ability to push back.

Still, many economists — including those at the International Monetary Fund — question whether the German model is really the best way to dig out of a recession, given the country's outsize reliance on exports. And the sense of a fait accompli is raising hackles around Europe. Slovakia recently held up a plan to bolster the bailout fund before it approved it under heavy pressure from Germany. Even longtime allies such as Austria are resisting.

"I can absolutely not accept" that Germany and France make decisions, then present them to the rest of the euro zone, Austrian Foreign Minister Michael Spindelegger told Austrian television last week. "There's no economic board or diktat. We have a euro zone with 17 countries."


In Germany, the dissension is raising eyebrows.

"Everybody is calling for leadership," said the country's deputy foreign minister, Werner Hoyer, "but no one wants to be led."

The washington post

How Europe can stave off a crisis

By Gordon Brown
The views expressed are his own.



It was said of European monarchs of a century ago that they learned nothing and forgot nothing. For three years, as a Greek debt problem has morphed into a full blown euro area crisis, European leaders have been behind the curve, consistently repeating the same mistake of doing too little too late. But when they meet on Sunday, the time for small measures is over. As the G20 found when it met in London at the height of the 2009 crisis, only a demonstration of policy intent that shows irresistible force will persuade the markets that leaders will do what it takes. An announcement on a new Greek package will not be enough. Nor will it be sufficient to recapitalize the banks. European leaders will have to announce a comprehensive–around 2 trillion euro–finance facility; set out a plan to fundamentally reform the euro; and work with the G20 to agree on a coordinated plan for growth.

For three years it has suited leaders across Europe to disguise Europe’s banking problems and, citing the blatant profligacy of Greece, they have defined the European problem as simply a public sector debt problem. And it has suited Europe’s leaders to call for austerity (and if that fails, more austerity) and forget how the inflexibility of the euro is itself dampening prospects for growth, keeping unemployment unacceptably high and weakening Europe’s competitive position in the world today. Indeed, Europe’s share of world output has now fallen to just 18 percent. And it is a measure of how it is losing out in the growth markets of the future that just 7.5 percent of Europe’s exports go to the emerging markets that are responsible for 70 percent of the world’s growth.



When I attended the first ever meeting ever of the euro group of leaders in October 2008 there was astonishment when I reported that Europe’s banks had bought half America’s subprime mortgages and there was incredulity when I said that European banks were far more at risk than U.S. banks because they were far more highly leveraged. Since 2008, as American banks have tackled their toxic assets, they have written off 4 percent of their loans and raised the equivalent of another 4% in new equity. But Euro area banks have written off just 1 percent of their loans, and have raised their capital base by only 0.7%, leaving them highly vulnerable even before their exposure to sovereign debt has become a central issue. Their vulnerability is increased because they have always been far more dependent for their funding on the short term and confidence-dependent wholesale markets, and countries within the euro are able to do far less in the face of capital flight than, say, Britain.

Of course in 2008, governments could fund the rescue of indebted banks; in 2011, indebted governments are finding that more difficult. For they know that even after they recapitalize the banks, they have still to deal with the even bigger financial problem of funding the borrowing needs of the most at-risk countries: Greece, Ireland, Spain Portugal and Italy, which could cost as much as $2 trillion in the years to 2014.



It is thus clear that the 400 billion euro rescue fund, the European stability find, is wholly inadequate to address this profound failure across the European financial system, and that without a mechanism for fiscal coordination the euro cannot easily survive. A few days ago, U.S. Treasury Secretary Tim Geithner said that “the critical imperative is to ensure that the governments and the financial systems under pressure have access to a more powerful financial backstop.”

I believe that only an impenetrable firewall will show the determination of European leaders to head off the crisis and save Europe from a new recession. I know of all the doubts about a new but temporary role for the ECB, but it is unlikely that any other organization has the resources for quick action. But the IMF should back them up, funding their contribution through loans from the oil states and China. It may now be impossible to avoid hundreds of billions in bank deleveraging and liquidations, but a coordinated approach with the support of the internationally community could provide the breathing space for what matters–the reform of the euro.



But radical as these measures are in staving off a financial crisis, they do not ensure a recovery. And once again Europe needs the support of the international community to grow. In 2011, no one continent on its own can reignite the world economy. But every country I know, from America to China, is trying to export its way out of trouble — and logically this strategy cannot work. A coordinated global growth strategy is the only sure way of maintaining high levels of employment and growth. And when the IMF examined the upside of coordination, compared with the downside if events took a bad turn, they discovered that world output would be 5.5% higher, employment would be 25-50 million higher, and there would be 90 million fewer in poverty.

Coordination is all the more necessary because we are at a unique historical juncture–in the transition to a new and more balanced global economy. For one hundred and fifty years until now, Europe and America produced the majority of the world’s manufactured goods, accounted for the majority of trade and were responsible for most investment and consumption. But in 2010 for the first time, America and Europe (the EU 27) were out-manufactured, out-produced, out-invested and out-traded by the rest of the world. Significantly, we were not out-consumed.



Only 40 percent of manufactured goods and even less investment may come from Europe and America, but they still consume 55 percent of the world’s goods and services. So today there is a precarious balance between producers and consumers. The West is the world’s majority consumer but not the world’s majority producer–and the rest of the world is the majority producer but not the majority consumer, so the West and the rest depend on each other. Ten years ago the West, then the world’s majority producer and consumer, could drive the world economy on its own. Ten years from now Asia may be able to do likewise. But for the moment at least, East and West either rise together or falter together.

This means that the G20 countries must do more than work with the ECB and IMF to smooth a euro rescue plan. At their meeting in November, they must push forward with a deal between the West and the rest of the world for growth. Of course there are other problems–exchange rates, trade restrictions, capital controls, and potential inflation–but these can be best addressed within a framework for growth.



By coordinated action, the G20 can push back on protectionist policies and give people confidence that the world economy can grow sustainably. None of this avoids the painful decisions that arise from the deleveraging by the banks, nor can they be a substitute for tough debt reduction plans. But if China increases consumption, and Asia opens its markets; and if America and Europe spend on infrastructure, (not least because Asia is out-building, out-investing and, perhaps soon, out-educating the West) then we can create a self reinforcing cycle of growth. Indeed if China were confident its export markets would not collapse and if the West were confident it could export more, then the world economy would move forward again. With inflation still relatively low, the time is right for a G20 growth and employment pact. It is not only the way forward for Europe but the right path for the whole world.







How Europe can stave off a crisis | The Great Debate

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