Bismarck versus Bismarck

ATHENS – The centrality of Germany to Europe and, more widely, to world affairs has been amply, and often bloodily, demonstrated over many centuries. Indeed, Germany’s strategic position at the heart of Europe, as well as its huge economic and military potential, made it first a prize to be sought, and then, following Otto von Bismarck’s completion of German unification in 1871, a nation-state to be feared. Bismarck’s legacy was a Germany that dominated European politics until the end of World War II.

That legacy is now reasserting itself. After the interlude of the Cold War, during which Germany served as the center of discord between East and West, reunification permitted the reassertion of German power within the context of the European Union and, most notably, the eurozone. Today, however, the question is whether Germany is ready and willing to provide leadership in the conduct of the EU’s affairs – and, if so, to what end.

Europe is currently facing its most challenging crisis of the postwar period. After six quarters of recession, the slump is spreading to the eurozone’s core countries. Unemployment, above 12% on average, is at a record high. In Spain and Greece, more than one-quarter of the labor force is jobless, while the unemployment rate hovers around 60% among young people. Despite harsh austerity, large fiscal deficits persist, and banks remain undercapitalized and unable to support a sustained economic recovery.

Social malaise is deepening as expectations – and actual prospects – for economic improvement are likely to remain poor for the foreseeable future. Faith in the European project is declining, and, given the eurozone’s lack of cohesion, stagnation and recession may lead to popular rejection of the EU, accompanied by serious challenges to democracy, including the rise of neo-fascist parties.

And yet, despite the risks, European leaders remain remarkably inactive, apparently reassured by European Central Bank President Mario Draghi’s promise to do “whatever it takes” to protect the monetary union from collapse. But prolonged inaction, induced by relative calm in financial markets, will perpetuate stagnation and eventually lead to a breakup of one sort or another. Either gradual attrition, with weaker countries defaulting, will lead to a more restricted German-led club of “virtuous” countries, or Germany itself will choose to pursue a policy of narrow fiscal advantage by seceding from the eurozone.

The political and economic weakness of France and Italy, together with Britain’s gradual withdrawal from EU affairs, highlight Germany’s key role in rescuing the eurozone from the current crisis. But true leadership requires a sense of direction and a willingness to pay up, and, here, Germany has lately been found wanting.

Despite German Chancellor Angela Merkel’s evident political skills and high domestic standing, her government lacks a concrete design for “ever closer Union” in Europe. As a result, it, too, is in a weak position to mobilize the resources and competences required to restore Europe. Instead, Merkel’s Germany has been doing as little as possible, as late as possible, to prevent the euro’s collapse.

This policy cannot endure for long. Either stagnation will lead to the eurozone’s breakup, or circumstances will force a policy change.

So, in which areas must Germany lead? First, European public debt should be partly and gradually mutualized. National banking systems should be unified, in order to separate private losses from sovereign debt, with centralized supervision and resolution authorities, as well as a deposit-insurance scheme, forming the core of a European banking union. Strong central institutions, responsible to a directly elected parliament, are needed to coordinate fiscal and economic policies.

In the shorter term, the single market should be extended to services, and free-trade arrangements should be promoted either multilaterally or bilaterally with major trading partners such as the United States. Austerity should be eased, particularly in the fiscally stronger core economies, and substantial resources should be devoted to boosting youth employment and investment in small and medium-size firms in the over-indebted countries.

Germany’s reluctance to lead on these issues partly reflects historical inhibitions, which are always difficult to overcome. The persistence of pre-Keynesian orthodoxy in German economic thought, with its moral abhorrence of the “sin of borrowing” (and thus its neglect of aggregate demand), does not help, either. The federalist structure of Germany’s political system, moreover, favors parochial approaches over grander designs.

Nonetheless, Germany must accept that the alternative to a democratically unified currency union is German economic hegemony. In the longer run, that outcome would destroy the common European project, in turn undermining Germany’s own economic prosperity and strategic security – a Bismarckian scenario from which Bismarck would have recoiled in horror.