A German perspective on the Eurozone crisis, and an analysis of the dilemma that Germany now faces.

Trying to explain the German approach to the Euro crisis, and to Greece, the "Economist" last week went back more than 400 years all the way to Martin Luther, to sin and damnation: "why should sinners be given an easy way out".

Actually, there is a much simpler explanation: Germans firmly believe in European integration, but have never whole-heartedly embraced the Euro. Grasping this ambiguity of the German frame of mind goes a long way to explaining Chancellor Merkel’s actions – or lack thereof – during the Eurozone debt crisis, and it helps to understand why Germans first tore apart the new rescue fund (EFSF, European Financial Stability Facility) for the Euro in public debate – and then adopted it by a huge majority in the Bundestag, the German federal parliament.

To start with the Euro: Germans never had a love affair with the new currency. For a simple reason: Germany did not really need the Euro. It had a very stable D-Mark, guaranteeing the lowest interest rates in Europe, and symbolizing the country’s post-war identity and economic success story.  A recent poll found that 50 % of Germans would like to have the German Mark back.

But Germans understood that reunification had changed the state of play in Europe, that a hegemony of the German Mark was not going to be acceptable to neighbours of a much bigger united Germany. Giving up the beloved Mark was the price Germany had to pay for reunification: This is what Helmut Kohl told his voters then, and they were given no choice. It is highly probable that, without German unification, the Euro would not have been introduced before the creation of a proper fiscal and political union. The introduction of the Euro was a leap of faith by Helmut Kohl and the Germans. It was the pledge Francois Mitterand and the rest of the EU demanded in 1990 to ensure that Germany’s economic strength would not turn into political supremacy.

Germans have honoured this pledge without ever complaining. "Leading" Europe has never been high on the German political agenda – and not just because there is no other word in German for "leader" than "Führer". For most Germans, the best (and only) way to secure lasting peace and prosperity has been to transcend the nation state and to create an ever closer union, an integrated Europe. Isn’t it ironic that now, with the Euro in trouble, the whole world calls for more determined German leadership, whereas the introduction of the Euro itself was designed to prevent exactly that – German leadership and dominance?

Seen from abroad, Germany possesses great strength and is seen as a natural leader. Not so at home, for a number of reasons:

§  First, Germans assess their own strengths very soberly. Digesting the financial burden of reunification after 1990, and digesting the introduction of the Euro during the last decade has not been a cakewalk. Germans endured the pains of structural reform to regain competitiveness, and after the Lehman collapse, Germany’s recession was one of the deepest among industrialised countries – although it had never indulged itself in a credit and spending boom like others. Yes: Germany’s economy has recently done very well, but the fragility of its export-dependent model has not escaped the cautious Germans.

§  Second, Germans are not sure their country is up to the challenges they face. An aging and shrinking population, an education system in permanent need of reform, an over-stretched welfare system, ethnic and religious friction, a seemingly dysfunctional immigration and integration policy, the nuclear energy phase-out: Germans doubt that strategies are in place to preserve their prosperity.

§  Third, Germans don’t like change: They have fallen in love with the status quo. The Federal Republic of Germany’s founding document, an anti-status-quo document like the US Constitution, defined overcoming the post-war division of Germany and of Europe as a major objective. After unification, Germans began to feel they had had enough change, and became more and more comfortable with the status quo. Outside politics, Germany actually displays an enormous degree of innovation, as the global success of the German export industry demonstrates. But Germany has largely privatized risk-taking and innovation. The private sector strength doesn’t carry over into the political sphere. As a political society, we have become a low-energy country. This is why it is such a huge task to get Germans motivated and excited about new, large, and costly strategic objectives. 

Against this backdrop, requests to spend billions in support of other countries some of which look almost as dysfunctional as East Germany at reunification, naturally get a cold reception: Would that not be beyond our means? What if, as a consequence, Germany’s own rating would be downgraded? Whom would that help? Who would help us?

Consequently, when the Greek debt crisis erupted, Angela Merkel’s initial focus was not so much on short-term help for Greece, but on repairing and improving the control and supervision mechanism of the Eurozone. Without proper rules and controls, Germans believe, the simple transfer of money is bad policy and sets the wrong incentives, because a Eurozone where miscreants know they will always be bailed out would not be sustainable in the long run. This is why Berlin lobbied so hard to strengthen the Stability and Growth Pact first.

There has been mounting pressure recently to use the European Central Bank as a lender of last resort for countries in trouble. But from the German perspective, a central bank which is forced to back fiscal profligacy will only undermine the unity of Europe in the long run. Overt monetizing of government debt is anathema to Germans.

This controversy points to an unresolved dispute between fundamentally different German and French approaches which overshadowed the birth of the Euro 20 years ago. Francois Mitterand wanted, in the French tradition, a European Central Bank which would be subordinate to the Heads of State and Government . Germany, in contrast, wanted a truly independent central bank, modelled after the Bundesbank. At the time, Germany prevailed – but France and others, to this day, have not resisted the temptation to try to use the ECB for the pursuit of political objectives beyond that of monetary stability.

Thus, a debate which should have been decided 20 years ago is now back on the table. That may actually be good for the Euro, and for the EU.

The strategy to build a stronger, more integrated Eurozone has an Achilles’ heel: time. Markets will not wait until treaty changes will have been hammered out. With contagion spilling from Greece into other countries, it became necessary to build a defence line in the meantime. This was the birth of the EFSF/ESM. However, as long as this rescue shield was "sold" as a measure to keep the Euro alive, it did not resonate well with Germans. They grasped the inconsistency that they were now supposed to shoulder the main burden to keep the currency alive that they had never seen as a vital interest for Germany.

During the summer of 2011, it dawned on Chancellor Merkel that this crisis required more than mechanical repair work of the Eurozone. In fact, it is now understood that the Eurozone debt crisis will be the defining challenge of her chancellorship: If she manages to pull the EU out of this mess, she is assured a place among the great leaders of Europe. This is why she has recently started to argue that this is no longer just about Greece or the Euro, but about the EU itself: 'If the Euro fails, so will the EU'. She has yet to convince many Germans that this is indeed true. But a huge majority in the Bundestag approved the enlarged EFSF in late September.

The crisis has actually demonstrated that Germans stand firmly behind the idea of a united Europe. Germans understand that there is no way back, that fiscal and political union, "more Europe", implying a further transfer of sovereignty from the national to the European level, is the – only – way forward. A powerful EU finance minister who could provide effective fiscal control and oversight is one of the tools under consideration, along with a permanent European Monetary Fund.

But can Chancellor Merkel generate support and enthusiasm among status- quo-loving Germans for yet another major EU treaty change for a new and improved EU and Eurozone? Reaching into the dark and taking the risk of proposing a comprehensive strategy for the EU is not exactly Angela Merkel’s traditional way of doing business. She prefers to take the cautious step-by-step approach, leading from behind. But, as one observer put it, even if our headlights reach only so far into the fog ahead, we might still want to tap our ultimate destination into the GPS. This is what Helmut Kohl did in 1989/1990 when he surprised the country and the world with his famous 10-point-program on German unity: A bold step forward! If Angela Merkel and her Finance Minister Wolfgang Schaeuble did the same today and defined a forward strategy for the Eurozone and the European Union, Germans might grumble, but they would follow. Even if, like Martin Luther, some of them feel that sinners should not be offered an easy way out.

*[This article originally appeared on Monthly Mind. A shorter version of this Monthly Mind – "Germans Love Europe, but Not the Euro" – appeared in the New York Times on October 12, 2011, p. A23.]