Ten bad reasons why Germany will not let go of the euro

Dr Gunnar Beck

‘If the euro fails, Europe fails.’ German Chancellor Merkel’s words remind one of her precedessor’s Helmut Kohl’s dictum that ‘European integration is the other side of the coin of German reunification.’  And just as reminiscent one set of words is of the other, so both are equally devoid of logic. Yet, they signify a deep-seated and abiding commitment to EU integration and the defence of the single currency which is not readily understood outside Germany. Mrs Merkel will defend the euro to the hilt, to her own peril, that of her country, and that of the euro itself. And the same holds for any mainstream German politician who might replace or succeed her.  The reasons for this are many, but in one way or another they all relate to Germany’s historical guilt complex, and the triumph of short-term calculus over long-term evaluation which is symptomatic of our Western democracies.

First, Chancellor Merkel, like Helmut Kohl and indeed almost any mainstream German postwar politician outside Bavaria, is a convinced pro-European and pro-integrationist. For better or worse, that means she is committed to the euro. It also means that she will defend for its own sake, not because it may be in Germany’s narrow economic self-interest, debatable as even that no doubt is.

Secondly, Merkel who is a clever politician and not beyond the occasional political volte face, as exemplified by her decision to phase out nuclear power plants after fighting the last election on a pro-nuclear platform, knows that after pledging somewhere between half and one trillion Germans euros to save the single currency – a sum which ignores further liabilities which may arise from some countries leaving the euro, additional leverage of the rescue fund and the TARGET2 claims by the Bundesbank – a sudden reversal of policy and German euro exit or ‘no more money’ stance would be one Uturn too many. She would have to explain a one trillion euro mistake, and would be criticised in the press and by the europhile opposition for having done too little too late. She could probably rely on majority electoral support, but that may not be enough to shield her against unprecedented foreign and domestic political and media criticism of the kind not experienced by any Germany Chancellor.

Thirdly, the German political establishment has been committed to ‘ever closer EU integration for the last six decades, ever since West Germany became a state in 1949. The euro is part of that integration process. Any German Chancellor who would pull the plug on the euro, would go down in history as an irresponsible and dangerous nationalist who placed narrow self-interest over wider responsibilities, turned his back on six decades of consensus–based integration politics, plunged Europe into a long recession, and would get no credit for having had the courage to avert a foreseeable, much greater calamity. By contrast, even if things go badly wrong, a pro-euro German leader who dutifully continues throwing more good money after bad until the markets finally lose confidence in the euro when there is no German money left, would still get credit – at home and especially abroad – for having done ‘the right thing’, for accepting Germany’s  everlasting historical responsibility, and failing not for the wrong but the right reasons, the spirit of international solidarity, whatever Germany’s expense.

Fourthly, the euro crisis no longer affords of any cost free options. If Germany had refused to bail out Greece, Ireland and others right at the start, she would have suffered a contraction of some export markets and written off some of the Bundesbank’s claims on other central banks, but there would have been no question of transfer payments, Eurobonds or a German bailout of Spanish and Italian banks. Germany, in theory, still remains free to leave the euro now and renege on all guarantees given on the perfectly lawful grounds that the beneficiaries did not fulfil their side of the rescue bargain. In this scenario, Germany would stand to lose somewhere around 800bn euros which is roughly the value of the Bundesbank’s TARGET2 claims against other eurozone central banks. Germany’s public debt would rise from its current 81.5% to an estimated 110% of GDP or more, which in turn would force up German government borrowing rates. The combined effect of a prolonged recession in the former eurozone and the write off or devaluation of a substantial amount of Germany’s foreign assets would have immediate, very significant although not catastrophic economic effects within Germany. Withdrawal now would mean disaster but avoid a catastrophe.

By contrast, if Germany simply continues granting loans and guarantees she cannot afford, or if the ECB buys up more government bonds that cannot be repaid, or if by Eurobonds, eurobills or some spurious means Germany finally agrees to full burden-sharing of all EU debts, the losses to the German economy and taxpayer can be spread out indefinitely and obscured and in part be paid for by inflation. The cost of a bail out will amount to dozens of billions of euros a year and the German public will over time see their savings devalued by a few per cent each year, but because it can be spread out and does not hit everyone at once will not appear to the electorate as catastrophic as a sudden write off and euro collapse. For Western governments costs that are lower overall but immediate almost always are a less attractive proposition than much greater but also more distant and less transparent long-term costs. Long gone is the time when long-term thinking was still possible in Western Europe.

Fifthly, few people and politicians have the strength to admit and correct an error. And German politicians are amongst the worst at realising when the time has come to cut one’s losses. That was true in both worlds wars, and it oddly remains true now.  Ms. Merkel was able to change her mind on nuclear energy because, although broadly supportive, she and her party never embraced France’s unqualified commitment to nuclear power. She cannot do the same with the euro as she committed herself early on, linked the euro rescue to the integrationist cause long ago, and has been whipping aid packages through parliament for the last two years. If she pulled out now, it would be like Hitler making with Stalin before the battle of Kursk – it would be the only rational course of action, but would also the admission of a colossal error. For this reason it will not happen.

Sixthly, there is no eurosceptic politician of note in Germany despite occasional reservations expressed by the leaders of CSU, the Bavarian wing of the ruling CDU led by Merkel. Both the Greens and the opposition SPD have criticised Merkel for not doing more, and both parties were advocating Eurobonds and the mutualisation of all eurozone government debt well over a year ago. The leader of the Greens, a man called Trittin, also demands a banking licence for the ESM, unlimited use of the printing press, and a bail-out for all European banks. If the current government were to be replaced by an SPD-Green coalition at the next election or before, the result would be a more, not less uncritical euro-support policy in Germany, until the moment when the euro support machine is switched off and Germany joins the intensive care unit as the latest euro coma patient.  Until such time or if Merkel is re-elected, she can continue presenting herself as Germany’s toughest negotiator insisting on strict assurances of tighter budgetary discipline in return for any German money – assurances and promises that are simply unenforceable.

Seventhly, politicians in Western Europe nowadays spend much more time with each and other political leaders than with anyone else except perhaps their own family and inner domestic political circle. German politicians, more so than others, desperately want to be liked when they go abroad. They fail to realise that generally Germans are not and will not be liked in Europe, but that they often can be and often are respected. Their pathetic attempt to be ‘likeable’ has involved establishing their communautaire credentials and the regular grant of transfer payments, aid and financial handouts to countries within the EU and beyond. These transfers have now reached unprecedented proportions, whilst the German economy is not as resilient as many believe. When it begins to falter under the weight of the additional debt burden so foolhardily shouldered by the German government, the point will soon come when Germany no longer has anything to give. German politicians will then realise if they are still, or ever were, liked and that the basis for the respect they should been content with this, was eroded further every time they threw another fifty billion into the black hole of the euro.

Eightly, only half of all German MPs have a constituency, the other half enter the Bundestag through their party’s list system. If an MP votes against the government, he is unlikely to be offered a list place at the next election, and if he does so more than once or twice then there are ways of ensuring that his constituency will deselect the sitting MP. And for those who seek advancement, ministerial posts and other lucrative or prestigious appointments, those tend to be in the gift of the party leadership which will offer preferment only in return for loyalty and obedience. Little wonder then, that for the last three decades there has been no noteworthy parliamentary rebellion against a German government.

Ninthly, appeal to Germany’s special historical responsibility is a political device by no means restricted to foreign political leaders and the press. It is invoked just as frequently by mainstream German politicians against political and other critics, and all the more readily when all other arguments run out.

Finally, Germany, like most other Western states except perhaps Ireland, Austria, Switzerland and Iceland, suffers from an oppressive climate of political correctness. In Germany, unlike Britain, ever closer EU integration is part of the agenda of political correctness – that package of bien pensant beliefs not shared by majority opinion but propagated and imposed by government, the media, NGO’s and other bodies on the population as a whole by a mixture of legal instruments, financial and other incentives and relentless indoctrination and even subtle adaptations of what is and is not acceptable language. Earlier this summer I published an article in the International Herald Tribune, in which I expressed doubt that Germany had profited from the euro economically. I was surprised at the resonance and even received a phone call from one of the two large German TV channels. We quickly agreed terms, time, and venue; suddenly my the TV journalist stopped and said: ‘Oh, you are not in favour of Eurobonds, but we need a German speaker from abroad who tells our viewers how much we all need Eurobonds.’ For one thing, no one had read my article.

None of these factors have anything to do with economics, and they certainly do not suggest why it is in Germany’s interest to save the euro. What they do instead is to foster and sustain a political climate within the German political establishment in which it is taken for granted that, seventy years after the war, Germany still has a special responsibility, and where even now it verges on the politically incorrect to doubt the rationale for ever larger euro bailouts. In such circumstances, it is as good as unthinkable for a Chancellor who is a committed EU integrationist, and has already committed hundreds of billions to the euro rescue, to go into reverse gear and cut her losses now.

If Merkel is lucky, she can kick the crisis along and into the long grass, and the euro will bump along, whilst the true consequences of a transfer union may not become clear to ordinary Germans and will be obscured by inflation for several years. And if in the end the euro does not survive and Germany will once again be presented with a bill for a disastrous error of judgement, she can still say that she tried her best, accepted Germany’s special responsibility, and that any other German politician would have done the same. On the other hand, if she pulls out now, there is every indication that she will blamed for the ensuing economic upheaval and for deserting her ‘partners’ in the hour of need. In these circumstances she may yet rely on the support of the German people, but she would become an international pariah. No German politician, not even Ms. Merkel who has greater integrity and is less given to amour propre than most, has the fortitude to withstand diplomatic isolation for the sake of averting long-term economic disaster for Germany. Seventy years after the end of WWII Germany, it appears, has not yet regained her sovereignty, i.e. the freedom to pursue her own national interests in accordance with majority opinion and subject to international law. Nor has the country become properly democratic, in as much as the government does not trust the German people to decide the very basic questions governing their economic and political future. This is well understood by perceptive observers like former UK Prime Minister Blair who reportedly advises his US and other international clients that his ‘German contacts assure him that the German government will do whatever it takes to save the euro’ even if the German people may wish otherwise. The German government  will try to save the euro, for no good reason except Germany’s own pathologies. When it fails, the pathologies are unlikely to go away.  

One thought on “Ten bad reasons why Germany will not let go of the euro

  1. Pingback: Die Geburt des europäischen Souveräns | Hans Hütt

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