The Myth of German Hegemony

Why Berlin Can't Save Europe Alone

German Chancellor Merkel and French President Hollande in Berlin. (Tobias Schwarz / Courtesy Reuters)

In 2010 and 2011, the first two years of Europe’s sovereign debt crisis, Germany seemed to emerge as the continent’s dominant power, possessing an unrivaled ability to shape its neighbors’ destinies. Enjoying unabated economic strength, Germany agreed to bear the largest burden in the eurozone’s financial rescue, and so it was able to determine the pace and methods of managing the crisis. It also influenced the economic and budgetary policies of Europe’s debt-ridden countries, such as Greece and Spain, and it used that authority to impose an agenda of reform and austerity across the eurozone. Witnessing these developments, some observers went so far as to proclaim the onset of German hegemony and argued that only Berlin could solve the continent’s woes.

Although Germany is, to be sure, the most important European country for overcoming today’s problems, its abilities to project its power at the EU level are substantially restricted -- and they will diminish further in the months ahead. Germany’s position as the chief backer of the eurozone’s stabilization arrangements does not necessarily translate into political supremacy. And as the euro crisis has escalated and Germany has lost political allies, it will now have to accept that the common currency area will only partly conform to its vision.

The first reason Berlin will struggle to implement its plans for Europe is that political developments of the last six months have left Germany a rather isolated giant. In 2010–11, it was largely because of cooperation between Berlin and Paris -- and the close partnership between their two leaders that came to be known as Merkozy -- that Germany was able to set European policy and disregard the attitudes of other eurozone members, generally the southern countries with large deficits. Now, France’s new president, François Hollande, has advocated a European pro-growth agenda that clashes with German Chancellor Angela Merkel’s preference for austerity and, in the view of many Germans, would not encourage national governments to implement necessary reforms. Meanwhile, Austria, Finland, and the Netherlands -- smaller eurozone members that traditionally side with Germany on economic matters -- have ceased to be reliable partners for Berlin, as populist forces have pressured their governments to withdraw from rescue mechanisms or demand stricter regulation of the recipient countries’ budgets in exchange for financial help. Berlin’s other usual allies in balancing against Mediterranean-style policy approaches, the United Kingdom and Poland, lack importance in the present crisis. Neither country uses the euro, and the eurozone is where the main political decisions on the future of Europe will be made. 

In this new context, Germany risks losing out in several regards. For starters, it can no longer demand substantial debt reductions and budget cuts in return for financial backing, nor can it threaten to veto any rescue package that does not include its preferred policies. This was not the case last year, when Germany was able to impose a budget-balancing fiscal compact on eurozone member states. Then, Germany’s threat to withhold financial support was credible. Now, however, the crisis has escalated to such a degree that a German veto of a rescue package would trigger a systemic crisis -- one that could unravel not only the common currency but also other, larger achievements of European integration such as the single market. Because Germany is liable for approximately 27 percent of the European rescue mechanisms and enjoys a singular position as the largest economy in Europe, it cannot refuse to back the euro without causing continent-wide damage.

On the flip side, because they are less important to the overall functioning of the eurozone, the smaller, fiscally healthy states that help finance the rescue mechanisms now have more leeway to adopt harsh policies toward the deficit countries. They can ask for guarantees, as the Finns did of the Greeks. They can call for throwing noncompliant member states out of the eurozone, as the Austrian foreign minister did in August. They might even threaten to withdraw from the eurozone themselves -- something that would be unthinkable for Germany or France. If the crisis deteriorates and the euro’s breakup seems likely, these small member states with comparatively low public debt levels may seek an early exit. By preemptively leaving the euozone, they would avoid getting stuck with the mess resulting from southern European countries’ abandoning the common currency. 

Germany, however, cannot make such threats -- mainly because no one would believe them. A German exit would spell the imminent death of the single currency, which would not only be an economic disaster but also carry a historical legacy that even Germany’s euro skeptics would not want to assume. If a disorderly German exit pushed southern European states into political, social, and economic chaos, German voters would no longer remember that the move was supposed to serve their best interests and would punish their government for letting the European idea fail. Moreover, the economic and financial losses for Germany would be incalculable. If Germany introduced a new currency, its value would skyrocket, destroying the country’s export competitiveness. Germany’s nearly two trillion euros of claims in Target 2, an interbank payment system for processing cross-border transfers throughout the EU, would make its withdrawal from the eurozone extremely costly, as much of that money would be lost.

As the continent’s crisis worsens, Germany will find it increasingly difficult to influence other European countries’ domestic policies according to its own norms. Berlin may want sanctions and controls to go into effect automatically when eurozone members run up large deficits, but in practice the decision to implement such measures will remain a political choice in each individual country. And as European publics grow more disillusioned with Germany’s agenda of structural reforms and austerity, they will demand a loose interpretation of the recently redesigned fiscal rules of the eurozone. What is more, the EU’s past experiences with big reform projects suggest that any attempt to establish a fiscal or full-fledged political union would involve complicated negotiations that would result in a compromise, not a German-made solution. So although Germany knows that market pressure is on its side, it will not simply be able to rearrange the euro area and the EU in its own image. 

Berlin must also consider the possible political fallout from its intransigent fiscal conservatism: Germany’s reputation in Greece, Italy, and Spain has already deteriorated, and it is beginning to erode elsewhere, too. If Berlin continues to demand balanced budgets, it could damage its bilateral relations with not only the eurozone’s debt-ridden countries but also European governments that normally favor German self-restraint. In the struggle to stabilize the euro, Germany does not enjoy sufficient ideological power to forge a consensus behind fiscal consolidation. Throughout Europe, the Merkel government’s call for austerity is perceived as a self-interested plea that would only stifle growth, not stimulate it. Pushing relentlessly for a Europe that abides by its vision, Germany risks losing many of its partners and turning its friends into skeptics.

Furthermore, the Merkel government’s preferred solutions for the future of the eurozone would carry underestimated financial and political costs for Germany itself, making voters less likely to go along with its plans. A political bargain enabling the great leap forward toward a European political union could involve countries’ sharing debt responsibilities, forming a banking union, and transferring money across political borders -- all of which would impose great costs and risks on German taxpayers. 

Moving forward, eurozone countries will most likely establish what is known as a liability union, sharing responsibility for one another’s debts, either private (in the banking sector) or public. Neither of these outcomes would match Germany’s preference for minimizing collective risks. Even pushing Greece out of the eurozone, so that Germany would not have to back it up, would probably lead to some sort of joint liability. If Greece leaves the eurozone, bank runs and bond market contagion would threaten the rest of the common currency area and require immense financial firewalls, a mutualization of debt, and some sort of union in the banking sector. If it pushes Greece to the brink, Germany may end up having to accept substantial responsibility for the rest of Europe’s fiscal and financial woes. And it would have to do so in an uncontrolled way, without being able to guarantee any further economic coordination or regulation of member states’ budgets. 

Berlin needs to be aware that stabilizing the euro and reforming the EU will not lead to a Germanized Europe. And indeed, Germany’s leaders are already coming to realize the limits of their particular vision. They know that the measures taken under strong German influence in 2010–11 were not sufficient to contain the crisis, which can be achieved only through further integration and reforms following a long negotiation process. Germany alone will not be able to push reluctant member states into surrendering more of their national sovereignty, nor will it be able to determine the outcome of the process. If it is to exert a strong influence, Berlin must reestablish close ties with Paris and buttress that partnership by bringing various other countries on board to advocate for deeper integration. This new openness will have to include both eurozone countries -- to consolidate the common currency -- as well as outsiders such as the United Kingdom and Poland, whose inclusion will be necessary to reshape the institutions of the EU. Germany must take the lead in building bridges between south and north, between givers and takers, and between the pro-austerity and pro-growth caucuses.  

In short, it is unlikely that Germany will be able to dictate how Europe resolves its sovereign debt crisis or reforms its institutions. Going it alone is not possible, because even the biggest payer and member state cannot unilaterally shape the rules. The coalitions necessary to rebuild the economic and political architecture of Europe will dilute German plans. Market pressure on crisis countries may have allowed Berlin, for some time, to implement its supply-side policy approach in the eurozone. But the crisis will not enable Germany to push through, without restriction, its own vision of European integration.  

 

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