This content is reserved for clients only. Login Now

Register now for a free trial to gain access to this piece and see how
you can benefit from an RGE subscription.

Analysis

Uncertain Giant: Germany’s Changing Role in Europe

By Katharina Jungen and Michael Moran

EXECUTIVE SUMMARY

The current financial and economic crisis—and in particular the still unfolding sovereign debt crisis in Europe—has highlighted a change in Germany's attitude towards the so-called “European project” and the quickening pace of Germany’s emergence from what might be called its post-war transition. While in the past often putting its interests second to European unity, Germany has now become much more outspoken about its own political and economic goals. German pronouncements on everything from the need for new financial regulations to NATO expansion into former Soviet territory to the proper role of the ECB had already riled its partners to varying degrees, but since the onset of the Greek crisis, these tendencies have grown much more pronounced. Germany’s unilateral adoption of a deficit cap, the initial resistance to a European bailout and, most recently, the unilateral restrictions on short-selling, all serve as evidence that the EU's largest economy is increasingly focusing on policy goals more consistent with its own unique export-dependent, highly prudent economy, even if those aims come at the expense of its European partners.

Even though Germany has benefited greatly—if not more than any other country—from EU membership and the adoption of the euro—some critics worry that the interests of Europe’s largest economy are diverging from those of ­­the rest of the bloc. RGE, however, views Germany’s changing role within the EU as a natural process through which Germany is finally assuming the political leadership position equivalent to its economic dominance. It remains to be seen how its EU peers will react to Germany’s new-found confidence, and the extent to which this new German posture will extend beyond EU matters to the international sphere. Within Europe, however, as Germany develops into the driver of further economic and political integration, the possibility of a political backlash over the notion of a “Germanized EU,” in particular from France, remains high.

Solo Efforts

Germany has been heavily criticized for a number of unilateral decisions it has taken in recent months that have raised questions about the strength of its commitment to consensual decision making at the European level and whether the country is pursuing its own interests, possibly at the expense of its EU partners. Germany’s unilateral adoption of a ban on the short-selling of some securities on 18 May, 2010—to the surprise of its European peers, in particular the French—is the most recent example of these solo efforts. While some countries, such as Spain and Austria, supported Germany’s initiative, Germany mainly received stern rebukes from European leaders. The EU’s internal market commissioner, Michel Barnier, warned of the risk of “regulatory fragmentation” and added that joint action at the EU level would have proved far more efficient. Others noted the ban would have little effect on the practice of short-selling, which in Europe is centered on the City of London, and that “naked shorts” had little to do with the basic issues driving the Greek/eurozone sovereign debt crisis. Nonetheless, the ban on naked short-selling of securities was in keeping with the other recent unilateral moves that have caught Berlin’s EU partners flat-footed.

Germany also attracted substantial criticism—in particular from France—for its unwillingness to rebalance its economy. Quite to the contrary, in early May 2010, the coalition government’s promised tax cuts, which would have boosted private consumption, were canned after its heavy defeat in regional elections. Moreover, in May 2009, Germany adopted a constitutional law limiting the federal budget deficit at 0.35% starting in 2016 while prohibiting regional governments from running deficits altogether after 2019. Germany failed to discuss this essentially toughened-up version of the Maastricht budgetary rule with its eurozone peers prior to its adoption. While most governments recognize the need to consolidate public finances, EU heads of states reacted with surprise that they were not even informed in advance and some wonder whether this unilateral policy making portends an effort to impose similarly stringent controls, regarded by some as impossibly severe, across the eurozone.

A Lack of Team-Spirit?

When Europe’s largest economy initially hesitated to provide the bailout funds for Greece, Germany was not only labeled selfish, but some observers also went as far as proclaiming the return of German nationalism. At the very least, the indecision significantly worsened the crisis and allowed something close to panic to develop in the crucial bond markets. From the German perspective, however, solidarity needs to be a two-way street and domestic tax payers feel their previous contributions to unity have been forgotten. After all, the German economy endured several years of painful, self-inflicted labor market and social security reforms, quasi-stagnant wage growth and constrained government spending, while at the same time other eurozone countries sharply increased consumption and failed to reform their economies. The EU as a whole benefited from Germany mustering the political will to enact such reforms earlier in the decade, not least because the country has managed to emerge in relatively good shape from the recent economic downturn and now finds itself in a strong enough position to support its European peers financially.

While far from abandoning the European project, German voters might be forgiven for starting to question the advantages of a monetary union. Tired of paying the bill for undisciplined member states, it comes as no surprise that 85% of the German population opposes a Greek bailout with German taxpayer money while 50% would like to reintroduce the Deutsche mark. Germany’s best-selling newspaper, the tabloid Bild, responded to the euro rescue plan with the headline: “Once again, we are Europe’s fools.”

From Consensus-Building to No-Compromise

Germany’s new-found reform style appears starkly at odds with its past strategy, which largely focused on building broad consensus among eurozone peers prior to taking action. In recent times, it seems as if Germany is less willing to put its interests second to the “European project.” Instead, Germany is pressing ahead with its own agenda, possibly in an effort to avoid the inevitable watering down of proposals to digestible, toothless reforms and the unnecessary micromanaging from Brussels. Germany views the concessions made during the initial negotiations of the Stability and Growth Pact as the seeds of the EMU’s current financial woes. As a result, the country is adamant about pressing ahead with its own agenda, even at the risk of jeopardizing European unity. Even though Europe’s largest economy no longer shies away from publicly disagreeing with its eurozone peers, Germany is far from turning its back on the “European project.” In fact, its insistence on leading the reform process shows that Germany is very much planning its own future within the eurozone. So, while critics are again raging against Chancellor Angela Merkel's proposal to withdraw voting rights from countries that do not adhere to the Maastricht criteria, a tough stance is—in the eyes of the German government—in the best interests of the eurozone.

On the World Stage

The events of the past several months in the eurozone have accelerated a dynamic that German policy makers—within Germany and among some of its allies—have tried for decades to smother. Since the end of the Cold War, which removed the existential threat of Soviet invasion from the political debate, Germany’s increasing share of EU GDP, coupled with increasing demands from the U.S. and others that Berlin shoulder more of a burden on the international stage, have encouraged a “coming out” process for German foreign policy.

At first, as in the pivotal role Germany played in encouraging Croatia and Slovenia to secede from Yugoslavia in the early 1990s, this new assertiveness was confined primarily to Europe, and particularly to German national interests in “the European project.” In the early 1990s, for instance, Germany repeatedly watered down French and Benelux initiatives for a standing EU army, still, at that point at least, more content with the British and U.S. preference for Europe’s military interests to be channeled through NATO.

The wisdom of this strategy, which has its roots in the post-war re-emergence of the West German state as an economic powerhouse, has been embraced by Germany’s main political parties, often in the face of resistance from German voters. (In spite of widespread protests in Germany, for instance, U.S. military bases in Germany operated at full capacity and without constraints during the 1990-91 Gulf War, the 1999 Kosovo campaign, the Afghan War that began in 2001 and even the 2003 Iraq War, the latter in spite of vociferous objections by the Social Democratic government of Chancellor Gerhard Schroeder).

The Iraq War marked something of a turning point, however, as post-war Germany’s innate pacifism, previously confined to the theater of the street, suddenly became official government policy. Breaking with the U.S. and Britain (and siding with France and Russia), Schroeder abandoned the previous deference to Washington in such matters, arguing (rightly, as it would turn out) that the march to war was premature and being pursued in the absence of solid evidence of weapons of mass destruction.

If Germany’s place in the transatlantic relationship shifted, so too did its ties to Russia. Schroeder and then Russian President Vladimir Putin enjoyed a close personal relationship, and over the course of the 1990s Russia had grown into the most important source of natural gas and other energy sources for Germany and many other European nations. The trend revived, among some western policy makers, age-old concerns about a “neutral” Germany subject to Russian economic pressure at the heart of Europe. Most analysts, including RGE, regard such fears as overblown. Indeed, Germany and the U.S. have found broad common ground since Merkel replaced Schroeder, and particularly since Barack Obama replaced George W. Bush.

All the while, of course, German troops had served in the multinational NATO mission in Afghanistan—the International Security Force in Afghanistan (ISAF)—a token presence at first that grew after Angela Merkel replaced Schroeder to some 4,500 strong—currently the third-largest contributing nation after the U.S. and Britain (although only representing 4.5% of total ISAF troop strength). The ISAF mission has proven an ambiguous one for German forces and Germany itself. Initially, German troops operated under strict rules of engagement that rendered them essentially unable to participate in combat situations. As such, the U.S. ISAF commander deployed the Bundeswehr to a quiet corner of the country.

Over the years, however, things have heated up in Kunduz, and lately German politicians have had to come to terms with the fact that the “stabilization mission” frequently referred to has mutated into a shooting war. In the face of polls showing the deployment to be deeply unpopular, however, Merkel has vowed to remain in the country and to increase the ability of German troops to act decisively. In April, Defense Minister Karl-Theodor zu Guttenberg, reacting to criticism from Gen. David Petreaus about the continued restrictions on German and other European forces, announced German troops would soon join their Afghan counterparts on counter-insurgency patrols, a move that will invariably lead to further casualties. Germany’s President Horst Koehler visited the troops on May 21, paying tribute to the 43 who have died since 2002 and underscoring the support ISAF enjoys among the political class, if not among German voters.

Meanwhile, Merkel has sought to place Germany at the center of efforts to tackle climate change, particularly in the wake of the unsuccessful Copenhagen summit last December. Merkel has been holding bilateral meetings with G20 heads of state to build momentum for a new push on the issue, with her government advocating the far more aggressive goal of preventing anything more than a two-degree increase in global temperatures. Currently, scientists believe a three-to-four degree increase is likely without serious action.

Towards a “Germanized Europe”?

All of these trends in economics and geopolitics set the stage for outside perspectives on Germany’s performance in the current crisis. German policy moves during the sovereign debt debacle have highlighted an already well known fact, namely that the country has spent decades playing down its natural weight in European—and, indeed, in international—affairs. Germany, as the largest European economy, was eventually bound to take responsibility for the main share of a financial rescue package. Its politicians will need to do a better job explaining the implications of that to German voters, but part of the process will entail a rebalancing of expectations: i.e., German voters will want to see their government insist on serious reforms of European prudential and fiscal regulations in exchange.

There is a good chance that Germany’s seemingly pushy, egoistic attitude will mean it succeeds in enacting necessary reforms given that, without Germany on board, the eurozone would most likely prove incapable of saving itself. The financial burden Germany is expected to bear should mean Berlin controls the agenda of the current efforts to reform the Stability and Growth Pact. However, the question remains, will Germany’s new confidence help further the economic and political integration of the EU or drive a wedge between its members?

France, for instance, could well lose patience as it becomes inescapably clear that Paris must cede its leading role in EU affairs to Germany, which acted for many years as a junior partner to France’s ambitions. Moreover, evidence suggests that friction between France and Germany has significantly intensified over the past year, with French Finance Minister Christine Legarde openly criticizing Germany’s export-dependence and tight wage policy; an outburst that would have been unthinkable just a few years ago. Nevertheless, while some European countries are vexed by Germany’s new-found leadership ambitions, several of the smaller member states are likely to welcome them given the pressing need for the EU to address its current large problems.

Register for a Free Trial