Germany's exposure and vulnerability thus make it an extremely active power.It is always under the gun, and so its policies reflect a certain desperate hyperactivity. In times of peace, Germany is competing with everyone economically, while in times of war it is fighting everyone. Its only hope or survival lies in brutal efficiencies, which it achieves in industry and warfare.
Pre-1945, Germany's national goals were simple: Use diplomacy and economic muscle to prevent multi-front wars, and when those wars seem unavoidable, initiate them at a time and place of Berlin's choosing.
"Success" for Germany proved hard to come by, because challenges to Germany's security do not "simply" end with the conquest of both France and Poland. An overstretched Germany must then occupy countries with populations
in excess of its own while searching for a way to deal with Russia on land and the United Kingdom on the sea. A secure position has always proved impossible, and no matter how efficient, Germany always has fallen ultimately.
During the early Cold War years, Germany's neighbors tried a new approach. In part, the European Union and NATO are attempts by Germany's neighbors to grant Germany security on the theory that if everyone in the immediate
neighborhood is part of the same club, Germany won't need a Wehrmacht.
There are catches, of course -- most notably that even a demilitarized Germany still is Germany. Even after its disastrous defeats in the first half of the 20th century, Germany remains Europe's largest state in terms of
population and economic size; the frantic mindset that drove the Germans so hard before 1948 didn't simply disappear. Instead of German energies being split between growth and defense, a demilitarized Germany could -- indeed, it had to -- focus all its power on economic development. The result was modern Germany -- one of the richest, most technologically and industrially advanced states in human history.
Germany and Modern Europe
That gives Germany an entirely different sort of power from the kind it enjoyed via a potent Wehrmacht, and this was not a power that went unnoticed or unused.
France under Charles de Gaulle realized it could not play at the Great Power table with the United States and Soviet Union. Even without the damage from the war and occupation, France simply lacked the population, economy and
geographic placement to compete. But a divided Germany offered France an opportunity. Much of the economic dynamism of France's rival remained, but under postwar arrangements, Germany essentially saw itself stripped of any
opinion on matters of foreign policy. So de Gaulle's plan was a simple one: use German economic strength as sort of booster seat to enhance France's global stature.
This arrangement lasted for the next 60 years. The Germans paid for EU social stability throughout the Cold War, providing the bulk of payments into the EU system and never once being a net beneficiary of EU largess.
When the Cold War ended, Germany shouldered the entire cost of German reunification while maintaining its payments to the European Union. When the time came for the monetary union to form, the Deutschemark formed the Euro's bedrock. Many a Deutschmark was spent defending the weaker European currencies during the early days of European exchange-rate mechanisms in the early 1990s. Berlin was repaid for its efforts by many soon-to-be Eurozone states that purposely enacted policies devaluing their currencies on the eve of admission so as to lock in a competitive advantage vis-à-vis Germany.
In 2003, the 10-year process of post-Cold War German reunification was completed, and in 2005 Angela Merkel became the first postwar German leader to run a Germany free from the burden of its past sins. Another election in
2009 ended an awkward left-right coalition, and now Germany has a foreign policy neither shackled by internal compromise nor imposed by Germany's European "partners."
The crisis is rooted in Europe's greatest success: the Maastricht Treaty and the monetary union the treaty spawned epitomized by the Euro. Everyone participating in the Euro won by merging their currencies. Germany received
full, direct and currency-risk-free access to the markets of all its Euro partners. In the years since, Germany's brutal efficiency has permitted its exports to increase steadily both as a share of total European consumption and as a share of European exports to the wider world. Conversely, the Eurozone's smaller and/or poorer members gained access to Germany's low interest rates and high credit rating.
And the last bit is what spawned the current problem.
Most investors assumed that all eurozone economies had the blessing -- and if need be, the pocketbook -- of the Bundesrepublik. It isn't difficult to see why. Germany had written large checks for Europe repeatedly in recent
memory, including directly intervening in currency markets to prop up its neighbors' currencies before the Euro's adoption ended the need to coordinate exchange rates. Moreover, an economic union without Germany at its core would have been a pointless exercise.
Investors took a look at the government bonds of Club Med states (a colloquialism for the four European states with a history of relatively spendthrift policies, namely, Portugal, Italy, Greece and Spain), and decided that they liked what they saw so long as those bonds enjoyed the implicit guarantees of the Euro.
Even though Europe's troubled economies never actually obeyed Maastricht's fiscal rules -- Athens was even found out to have falsified statistics to qualify for Euro membership -- the price to these states of borrowing kept dropping. In fact, one could well argue that the reason the PIGS never got its fiscal politics in order was precisely because issuing debt under the Euro became cheaper. By 2002 the borrowing costs for the PIGS had dropped to within a whisker of those of rock-solid Germany. Years of unmitigated credit binging followed.
The 2008-2009 global recession tightened credit and made investors much more sensitive to national macroeconomic indicators, first in emerging markets of Europe and then in the eurozone. Some investors decided actually to read the
EU treaty, where they learned that there is in fact no German bailout at the end of the rainbow, and that Article 104 of the Maastricht Treaty (and Article 21 of the Statute establishing the European Central Bank) actually forbids one explicitly. They further discovered that Greece now boasts a budget deficit and national debt that compares unfavorably with other defaulted states of the past such as Argentina.
Investors now are (belatedly) applying due diligence to investment decisions, and the spread on European bonds -- the difference between what German borrowers have to pay versus other borrowers -- is widening for the first time since Maastricht's ratification and doing so with a lethal rapidity. Meanwhile, the European Commission is working to reassure investors that panic is unwarranted, but Athens' efforts to rein in spending do not inspire confidence. Strikes and other forms of political instability already are providing ample evidence that what weak austerity plans are in
place may not be implemented, making additional credit downgrades a foregone conclusion.
As the EU's largest economy and main architect of the European Central Bank, Germany is where the proverbial buck stops. Germany has a choice to make.
The first option, letting the chips fall where they may, must be tempting to Berlin. After being treated as Europe's slush fund for 60 years, the Germans must be itching simply to let Greece and others fail. Should the markets
truly believe that Germany is not going to ride to the rescue, the spread on Greek debt would expand massively. With Greece now facing a budget deficit of at least 9.1 percent in 2010 -- and given Greek proclivity to fudge statistics the real figure is probably much worse -- any sharp increase in debt servicing costs could push Athens over the brink.
The shock of a Greek default undoubtedly would motivate other European states to get their acts together, budget for steeper borrowing costs and ultimately take their futures into their own hands. But Greece would not be the only default. The rest of the PIGS is not all that far behind Greece, and budget deficits have exploded across the European Union. Macroeconomic indicators for France and especially Belgium are in only marginally better shape than those of Spain and Italy. Ireland also is in big trouble.
Berlin could at this point very well ask why it should care if Greece and Portugal go under. Greece accounts for just 2.6 percent of Eurozone gross domestic product. Furthermore, the crisis is not of Berlin's making. These states all have been coasting on German largesse for years, if not decades and isn't it high time that they were forced to sink or swim?
The problem with that logic is that this crisis also is about the future of Europe and Germany's place in it. Germany knows that the geopolitical writing is on the wall: As powerful as it is, as an individual country (or even partnered with France), Germany does not approach the power of the United States or China and even that of Brazil or Russia further down the line. Berlin feels its relevance on the world stage slipping, something encapsulated by U.S. President Barack Obama's recent refusal to meet for the traditional EU-U.S. summit. And it feels its economic weight burdened by the incoherence of the eurozone's political unity and deepening demographic problems.
The only way for Germany to matter is if Europe as a whole matters. If Germany does the economically prudent (and emotionally satisfying) thing and lets Greece fail, it could force some of the rest of the Eurozone to shape up and maybe even make the Eurozone better off economically in the long run. But this would come at a cost: It would scuttle the Euro as a global currency and the European Union as a global player.
Every state to date that has defaulted on its debt and eventually recovered has done so because it controlled its own monetary policy. These states could engage in various (often unorthodox) methods of stimulating their own recovery. Popular methods include, but are hardly limited to, currency devaluations in an attempt to boost exports and printing currency either to pay off debt or fund spending directly. But Greece and the others in the Eurozone surrendered their monetary policy to the European Central Bank when they adopted the Euro. Unless these states somehow can change decades of bad behavior in a day, the only way out of economic destitution would be for them to leave the Eurozone. In essence, letting Greece fail risks hiving off EU states from the Euro. Even if the Euro -- not to mention the EU -- survived the shock and humiliation of monetary partition, the concept of a powerful Europe with a political center would vanish. This is especially so given that the strength of the European Union thus far has been measured by the successes of its rehabilitations -- most notably of Portugal, Italy, Greece and Spain in the 1980s -- where economic-basket case dictatorships and pseudo-democracies transitioned into modern economies.
And this leaves option two: Berlin bails out Athens.
There is no doubt Germany could afford such a bailout, as the Greek economy is only one-tenth of the size of the Germany's. But the days of no-strings-attached financial assistance from Germany are over. If Germany is going to do this, there will no longer be anything "implied" or "assumed" about German control of the European Central Bank and the Eurozone. The control will become reality, and that control will have consequences. For all intents and purposes, Germany will run the fiscal policies of peripheral member states that have proved they are not up to the task of doing so on their own. To accept anything less intrusive would end with Germany becoming responsible for bailing out everyone. After all, who wouldn't want a condition-free bailout paid for by Germany? And since a Euro-wide bailout is beyond Germany's means, this scenario would end with Germany leading the EU hat-in-hand to the International Monetary Fund for an American/Chinese-funded assistance package. It is possible that the Germans
could be gentle and risk such abject humiliation, but it is not likely.
Taking a firmer tack would allow Germany to achieve via the pocketbook what it couldn't achieve by the sword. But this policy has its own costs. The Eurozone as a whole needs to borrow around Euros 2.2 trillion in 2010, with
Greece needing Euros 53 billion simply to make it through the year. Not far behind Greece is Italy, which needs Euros 393 billion, Belgium with needs of Euros 89 billion and France with needs of yet another Euros 454 billion. As
such, the premium on Germany is to act -- if it is going to act -- fast. It needs to get Greece and most likely Portugal wrapped up before crisis of confidence spreads to the really serious countries, where even mighty German's resources would be overwhelmed.