Daily, at least, someone in the blogosphere or media points out the irony: having attempted twice in the last century to force its writ on its European neighbors at gunpoint, in the twenty-first century Germany has a new weapon: sovereign default.
Call it Schnittskrieg: a war of cuts, deep, damaging austerity that amputates and excises and rearranges the targeted economies until – at least in theory – they can safely be allowed to maintain their links to the Reich … I mean, euro zone.
An unfair characterization? Perhaps a bit overdone, I’ll allow. But from the point of view of many in Europe – and not just “those old enough to remember” – a bit of hyperbole right now seems warranted.
The need for Europe’s PIIGS (Portugal, Italy, Ireland, Greece and Spain) to produce viable, medium-term blueprints for major reform and fiscal deleveraging cannot be debated. But German actions (and German inaction in some cases) have made the situation worse, imposing radical austerity that destroyed any chance for growth in these economies. At the same time, German policymakers have dictated European monetary and other policies that target inflation and ignore the pain this causes by preventing the euro from depreciating on international currency markets, rendering the bright spots inside these small economies – the Greek shipping sector, Ireland’s high-tech firms, for instance, or Spain’s vibrant telecoms and wine industries – impossibly uncompetitive at precisely the moment when they are most vital to national survival.
On the surface, German Chancellor Angela Merkel seems to be balancing domestic political interests (“stop sending our hard-earned money to bailout profligate Greeks) against hard economic reality (the collapse of the single European market hurts no economy as much as Germany’s, whose manufacturers have thrived since the euro zone’s creation).
This oversimplifies the issue, however. For Germany’s economic policymakers, wired to focus like a laser beam on hyperinflation of the kind that destroyed the Weimar Republic and brought you-know-who to power, this is a teaching moment. Most economists insist the obvious fix is to allow the European Central Bank to act as the Fed did in 2008 – standing at the ready to lend into the crisis and prevent credit markets from seizing up, moderating the rise of the euro via some depreciation, snuffing out systemic risks like major bank defaults and the contagion that implies from taking down the global economy.
Irwin Stelzer, director of economic policy at the Hudson Institute, lays out Germany’s battle plan in the Wall Street Journal:
“Lenders fleeing from risk put their money in safer bunds, keeping German interest rates low, saving Germany €20 billion between 2009 and 2011, with an additional €20 billion still to come according to a Brussels research institute. The troubles of Greece et a l. are keeping the euro lower than it would otherwise be, fueling Germany’s export machine. And German voters heartily approve of Ms. Merkel’s insistence on teaching the overly-indebted nations the virtues of German prudence and hard work.”
So what, you realists say? Germany should look out for itself – like all great nations do. Perhaps, but other “great nations” have a huge stake in this problem, and the Fed’s intervention on Thursday should have put to rest any silly questions about whether Europe’s flu could spread across the Atlantic.
Arguing for precisely this move, the codirectors of the Center for Economic Policy Research laid out the global stakes here as they demanded action:
“The risk of a financial meltdown in Europe is significant and growing each day,” wrote Dean Baker and Mark Weisbrot. “The financial fallout could be bigger than that following the collapse of Lehman Brothers in 2008, and could easily push the U.S. economy into recession. The European authorities are moving much too slowly to contain this risk. The European Central Bank (ECB), especially, is not fulfilling its function as a central bank to act as a lender of last resort in a crisis situation.”
The Fed’s coordinated action spurred a rally on Wall Street and other markets, but it really only provided blood for a patient that is hemorrhaging from multiple sovereign wounds. Yet Germany continues to refuse to act – or to allow the ECB, which it controls for all practical purposes, from intervening.
Merkel, speaking Friday, insisted the idea of a “Eurobond” backed by the healthiest six EZ economies, or massive ECB intervention to restore confidence that there is a “bottom” to the crisis, both remain out of the question. The debt crisis, she told her parliament today, is a marathon, not a sprint. A strong Germany – and Germany’s economy has chugged along quite nicely so far, thank you – is synonymous with a strong Europe. Ipso facto, I’m not going to do anything to hurt the German economy even if it causes enormous pain outside of it.
“Marathon runners often say that a marathon gets especially tough and strenuous after about 35 kilometers. But they also say you can last the whole course if you’re aware of the magnitude of the task from the start.”
Some advice to the chancellor: Don’t let the Spanish or Irish runners get hold of that starting gun. They are angry – and while the know they have themselves to blame for allowing things to get out of hand during the bubble years, they also see clearly that Germany’s selfish approach to the solution has made their plight far worse than it needs to be. They also understand that Germany’s true interest – protecting German financial giants like Commerzbank, Deutsche Bank and others that lent recklessly in the boom years – has taken precedent.
The anger directed at Berlin takes on local characteristics, of course. The Greek media has taken to dressing up Merkel in an SS uniform. In one, a Greek “collaborator” points out a man relaxing in a café to a group of arm-banded German soldiers (the swastika replaced by the euro’s symbol, €). The incredulous caption: “Here’s another one enjoying a coffee!”
In Ireland, bailed out last year by the European Financial Stability Facility (EFSF), some ask whether they fought the English for 300 years only to wind up ruled by Berlin. As one Irish commentator puts it, “Is this what Ireland has come to? A country which by 2016, the 100th anniversary of the 1916 Rising … sold our assets [and] ceded our sovereignty to a nation which only 60 years ago was butchering its way across Europe. “
But the die seems cast, and Schnittskrieg, relying as it does on the markets rather than the Luftwaffe or Wehrmacht to bring smaller nations to heel, is working like a charm. So, does this mean Merkel has Die Volk back home on her side?
Hardly. This is where the analogies end, however. For Germans, enthusiastic participants in the last century’s effort to take over the continent, want nothing to do with it today.
Spiegel, Germany’s best news magazine, ran a roundup on its website this week of newspaper editorials entitled “Germany as Isolated on Euro as US Was on Iraq. The round up is filled with anguished accounts of Germany’s dilemma, from left and right.
Die Welt, the conservative weekly, wrote an oped labeling Germany “Europe’s indispensible nation,” borrowing a phrase from U.S. Secretary of State Madeleine Albright. In the 1990s, of course, Albright meant used that phrase to emphasize America’s willingness to wear the mantle; in contract, Die Welt regards it as an affliction.
“Scarcely a people is less suited to this task than the contrite Germans, who spent decades pretending to be smaller than they really are and who would prefer to be just a big Switzerland in foreign policy terms. But now they’re suddenly realizing that the world is relying on them to save the euro and avert a disaster for the global economy. The Germans are going through a crash course in being a leading power.”
Let’s hope the lesson sinks in soon.
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