Germany Must Embrace its Crown of Thorns
Note: This piece was originally published in the Economist as the opening piece in the Debate on Germany's role in Europe
Germany's pole position in the handling of the euro crisis is evident from the fact that everything is on hold until after the German elections, even as German red lines continue to define the contours of current policies in the euro area. Without Germany's economic might behind it, no solution to the euro area crisis is possible.
However, its influence on the political, intellectual and economic aspects of the handling of the euro crisis belies Germany's lack of leadership on these dimensions. The failure of intellectual leadership is perhaps the most pernicious of the three.
The absence of diversity and depth in the German debate on the euro crisis is striking. The inaccurate 'lazy southerner' narrative dominates public and private discussions, and the need for austerity is taken as a given, no matter what the evidence. 'Fuzzy' matters, such as the danger that sharp fiscal adjustment poses to social cohesion and political stability in crisis countries, get short shrift.
There is little discussion of the extent to which Germany itself has benefitted from the euro and no debate on its own role in the imbalances that plague the euro area. Germany sincerely wants the rest of the euro area to spend less, save more and export its way out of trouble revealing an inability to appreciate the fallacy of composition. It has brought a small country mentality, already a problem when Germany was just the economic powerhouse of the euro area, to decision-making at the European level. It peddles country level solutions to what is a systemic crisis.
Meanwhile, the fear of inflation and moral hazard remain the biggest German bugbears, leading it to veto sensible proposals such as a banking licence for the European Stability Mechanism (ESM) and the debt redemption fund proposed by its own council of economic advisers.
Politically, Germany has allowed parochial domestic considerations such as Lander elections to repeatedly delay and water-down steps needed to tackle the crisis. It has gained notoriety, albeit a tad unfairly, for an obdurate approach to the euro crisis as other countries and EU institutions anticipate German positions and increasingly self-censor. Even as Germany has trumpeted the need for a more powerful EC, it has played no small role in bypassing, ignoring and neutering it.
Beyond the German executive, other institutions such as the Bundesbank, the Bundestag and the BVerfG also look obstructionist—blissfully unaware that were institutions in other countries to follow in their footsteps, the euro area would be condemned to perpetual gridlock. Many other countries are doing more—paying larger amounts per capita or undertaking politically toxic sharp adjustments with much less fuss.
Parochialism and procrastination are the exact antithesis of political leadership, particularly given the interconnected and urgent nature of euro area problems. Any solution must necessarily be systemic in nature and here Germany has not proposed a credible way forward.
Germany's failure to provide economic leadership is equally stark. It rejects its own responsibility in contributing to the adjustment process, despite being the largest creditor and surplus country in the euro area, choosing, instead, to impose most of the burden of adjustment on crisis-ridden debtor economies.
On structural reforms, too, it has failed to lead by example. It is resting on its laurels and has implemented few of the necessary structural reforms of its own in five years, even as it preaches their virtues.
Moreover, German policymakers have a paradoxical relationship with financial markets—condemning irrational markets when it suits them even as they stress the importance of 'market discipline' for other countries to get their houses in order. Ignorance of, or worse, indifference towards finance has manifested itself in German positions on bank bailouts, debt restructuring and that little matter of a Grexit. While asking others to clean up their banking systems, Germany has pandered to its own and has been shamefully responsible for watering down stress tests and minimum capital requirements for banks in the EU.
If leadership in the euro crisis is wrongly defined as influence on policies, Germany has been a very powerful, if perverse leader. Such leadership the euro area can do without.
With great power comes great responsibility. True leadership involves promoting collective good over parochial self-interest, being long-term oriented not short-term expedient, being magnanimous not petty, forgiving not blaming, decisive not procrastinating, and opening yourself to new ideas by rejecting long-held prejudices.
In Germany's defence, no one expects any other 'ordinary' member state to be capable of this kind of leadership. It is a thankless job, but a necessary one. It will undoubtedly attract brickbats, mistrust and accusations of overreach, but this is happening anyway. It will carry huge risks and no guarantee of success, but the biggest risk lies in doing too little, too late. That is condemned to certain failure.
Only the extraordinary Germans can pull this off and will be intellectually, politically and economically better off for having tried. It is this kind of German leadership that the euro area craves. It is time for Germany to embrace its crown of thorns.
Sony Kapoor is Managing Director of Re-Define and a Senior Visiting Fellow at the London School of Economics