Merkel’s Shaky Europe

By Steven Hill, IP/IP Journal (Berlin), April 3, 2014

The Ukraine crisis points out the continent’s weaknesses — made in Germany

(German-language version here)

Until now, German Chancellor Angela Merkel has weathered the euro crisis well enough. But the Russian annexation of Crimea illustrates the fragile state in which the old continent still finds itself. This is largely the result of Merkel’s lack of vision when it comes to European policies – and her new SPD coalition partners are unlikely to change this.


Germany has been led by eight chancellors since 1949, and many of them have been world-class leaders. Their vision and achievements have been immortalized in portraits that hang in the Gallery of Chancellors on the first floor of the chancellery building. Helmut Kohl reunited west and east, Willy Brandt implemented Ostpolitik; Helmut Schmidt pursued policies that consolidated Germany’s Wirtschaftswunder (economic miracle) as well as the unification of Europe. Gerhard Schröder is credited with tough policies that restored Germany’s competitiveness and exports, Konrad Adenauer with stabilizing Germany on a path of peace and democracy following the horrors of two world wars. Each of these leaders, in their own way, displayed a grand vision for domestic, European, transatlantic, and global affairs.

How does Chancellor Angela Merkel measure up against her predecessors? After eight years in office, Merkel has had difficulty articulating her own such vision capable of unifying the various dimensions of German and European politics. So far her signature achievement has been providing steady leadership during the cliffhanger turbulence of the eurozone crisis. In previous articles I praised her for projecting confidence and reassuring financial markets and the broader public during the early chaos of the Greek default crisis. Germany’s brand of austerity economics initially had its place, with its emphasis on debt consolidation as a way of steadying the boat in rocky seas.

But rust never sleeps, and new challenges such as the Russian reclamation of Crimea continually test Merkel’s leadership over how to pilot not only Germany but also Europe. Germany, as Europe’s largest economy and most populous nation, has the power to veto any other member states’ initiatives. But doing so is not the same as showing leadership.

Indeed, Merkel is the first German leader since World War II who appears to have no grand plan for how to pull Europeans closer together or to further europeanize Germany. And the policy of economic engagement with Russia as a vehicle for forging common bonds, which began under her predecessor Gerhard Schröder (who subsequently became cozy with Gazprom and Russian energy interests as chairman of the board of Nord Stream, which aims to supply Russian gas directly to Germany), now lies in tatters. Merkel’s brand of always “do as little as possible” has broken with her many predecessors’ bold trajectory that for over fifty years gave essential leadership and momentum to the European project and to world affairs.

Social Democrats to the Rescue?

Many hoped the inclusion of the Social Democratic Party (SPD) in the new grand coalition might act like a rocket booster, nudging the German government back into its historic leadership orbit. Since the time of Helmut Schmidt and Willy Brandt, the SPD has been firmly pro-Europe, and SPD Foreign Minister Frank-Walter Steinmeier has previously held the same position, making him less easily controllable than his FDP predecessor. Already he has made comments regarding Turkey’s EU membership bid (“the door needs to remain open”) that run contrary to CDU positions (“no way”). Deputy Chancellor Sigmar Gabriel, also from the SPD, likewise is itching to play a prominent role in EU policy, and already has accompanied Finance Minister Wolfgang Schäuble to eurozone meetings, unlike his predecessor. Might the SPD influence Merkel’s foreign policy, tilting it in a different direction?

It seems that the SPD does not differ substantially from Merkel in how it approaches either eurozone challenges or European leadership. The negotiated grand coalition agreement mostly reinforces “muddling through” as Germany’s bipartisan approach to the eurozone. While Steinmeier announced in early February a new foreign policy of greater global engagement, the rhetoric was stronger than the details, and the recent Ukrainian crisis has resulted in more typical Merkel-like caution. Indeed, Merkel’s (as well as other European leaders’) reluctance toward more enlargement in general, and its ambivalence toward Ukraine in particular, provided Russia the opening that led to the current neighborhood crisis. Confusion has its costs.

While muddling through has been sufficient to get Europe through the worst of the economic crisis, it is highly unlikely that it will be successful in building a vibrant 21st-century Germany or Europe.

Germany’s Clumsy Economics

Germany’s continuing insistence on policies focused mostly on increasing competitiveness and reducing debt levels and inflation – otherwise known as austerity – has only led to miniscule growth, high unemployment, borderline deflation, and even higher debt levels for far too many member states. Much of Europe is stuck or going backwards, and Merkel seems unconcerned about her policies’ longer-term consequences and the north-south divide they are cleaving.

While Germany, Sweden, and others enjoy surpluses and enviable economies, other member states are suffering through economic contraction and high unemployment as a result of cuts in government spending to reduce budget deficits. When combined with a punishing euro exchange rate, decreasing exports outside the eurozone by making them more expensive, this has forced Italy, Spain, Greece, and others to do the impossible: service their rising debt burdens with shrinking economies. Whatever the initial benefits of budget consolidation and austerity as a way to steady the ship, at this point continued German-led austerity is threatening to sink Europe’s fragile recovery.

Certainly Merkel has a point that governments cannot simply run up unlimited debt. Her fellow eurozone leaders completely agree – even Greece, which for the first time in a decade had an annual budget surplus last year. But there’s a flip side to that coin. For example, even though Greece and Spain’s painful internal devaluation has resulted in a competitiveness gain of approximately 5 percent vis-à-vis Germany, the euro has appreciated 5 percent against the dollar and other international currencies. So the euro’s appreciation has wiped out most of the gains that would have allowed Greece and Spain to increase their exports outside the eurozone.

With Germany declining to substantially boost its own eurozone imports or to participate in a transfer union or debt sharing like eurobonds, the eurozone is becoming a losing proposition for many member states. Germans must recognize that it will be a very long time – if ever – until member states like Greece, Portugal, Italy, and Spain can be competitive with Germany. In the meantime, record unemployment, low growth, and virtual deflation are crippling them, and Germany’s “solutions” are akin to bleeding the patient to save it. Eurozone exits for one or more member states are still a real possibility, which destabilizes the still-fragile currency union.

Certainly some aspects of the German coalition agreement, such as the eventual minimum wage increase and sectoral labor negotiations that could lead to higher wages, will allow a bit of reflation and a rise in German consumption that should boost imports a bit from other eurozone states. But the impact is likely to be insignificant. German economics professor Sebastian Dullien has estimated Germany’s domestic demand will receive an annual growth boost of a little more than 0.1 percent, which in turn will contribute to lowering Germany’s trade surplus by about 0.5 percent of GDP. “This might contribute to a rebalancing within the eurozone, but not by a decisive amount,” says Dullien. “The current German account surplus will remain dangerously large.”

At this point in the trajectory of the economic crisis, the policy alternatives to austerity are crystal clear: targeted stimulus spending (jump-starting eurozone economic growth); more federalism (including transfers from better-off member states and debt-pooling in the form of Eurobonds); a robust banking union (guaranteeing depositors and breaking the negative feedback loop between national banks and member states); and policies targeted to balance trade within the eurozone. But what has been lacking is the political will to do what is necessary. Even the Social Democrats seem unwilling to take the next obvious steps.

Thus, while all seems quiet at the moment, the eurozone in fact has reached a dangerous impasse in which some states are doing all right while others are suffering. As Germany celebrates a sense of having weathered the storm, for Spain, Portugal, Italy, Ireland, and Greece, the crisis has never subsided. Now even the Netherlands has become the latest country locked in a vicious austerity cycle of cuts in government spending contributing to higher unemployment, which has resulted in less tax revenue and greater deficits followed by a doubling down on austerity to reduce the increased debt. The head is chasing its own tail and never catching it.

Certainly Merkel also is correct that budget discipline is necessary to keep Europe’s economic model sustainable. Yet even here, Merkel and her finance minister Schäuble have failed to advance a compelling economic vision or grand initiative for how Europe may succeed at this, other than to keep bleeding the patient by staying the course on austerity. At this point, such passivity in the face of Europe’s existential challenge is woefully inadequate. For Spain, Italy, Portugal, Greece, Ireland, and now even the Netherlands, being locked into the “gold standard” of the euro along with a rigid and insular partner like Germany is increasingly a bum deal.

The tug-of-war with Russia over Ukraine shows how important it is that Europe put itself on a course that is stable, prosperous, and unified. Merkel needs to take a hard look at those portraits of her predecessors hanging in the Gallery of Chancellors.

STEVEN HILL is a political writer and author of Europe’s Promise: Why the European Way is the Best Hope in an Insecure Age.  Follow him @StevenHill1776.

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