Europe to Germany: your eurocrisis 'answers' don't work for us

As prosperous Germany reshapes Europe's fiscal operating system to fit the German doctrine of austerity, questions and warnings are on the rise.

The euro crisis: It sounds like an arcane finance story. But as Germany sets the tone and the rules, the crisis has great meaning for Europe's future. Germany's foreign minister calls it a "defining moment for the image of the European Union." Critics say Germany is a bully, twisting Europe's arm with an austerity regime that will bring subservience. Is it a new era of the strong versus the weak? Below is the case made against a "German doctrine." To read a case made for it, read here.

A Nordic official sent to a top euro crisis meeting last fall came out complaining: When questions started percolating, German Chancellor Angela Merkel and French President Nicolas Sarkozy disappeared into a room and emerged later with "answers," the official said, that were the final word.

As Germany takes the lead and refigures Europe's fiscal operating system into its doctrine of austerity, questions and warnings are on the rise.

A new EU “fiscal compact” limiting debt does show the German idea is starting to take hold politically. Yet support for it in Europe is thin and often agreed to in lockstep, without an alternative. Germany is often depicted in this scenario as Henry Higgins in My Fair Lady, oblivious to his impact, and asking why women can’t be more like men.

The immediate question is whether the EU can grow under a model of "living within means," as budgets are cut for the foreseeable future.

Core criticisms of German tenets include:

• Germany's export success is a German thing; Europe cannot quickly become another Germany.
• The doctrine of austerity is a long-term reform that ignores short-term pain and possible chaos.
• Despite a new nod to growth, there's no realistic growth plan for drastically shrinking economies.
• The German doctrine will inherently force changes in the eurozone, perhaps even pushing Greece out, or creating a two-track system.

"The German answer so far is to revise previous rules to make stricter rules," says Philip Whyte of the Center for European Reform in London. "Rules may help in the long term, but there's an immediate crisis in households and nations. Germans are sincere in the belief that Italy and Spain will benefit from reform. But austerity without growth reminds me of policies in the '30s: slashing spending as economies contract."

A common complaint is that Germany seems blithely unaware of the effect of its policies. Ms. Merkel is criticized often for treating her own domestic political problems as cataclysmic hurdles to surmount, but brushes off the problems of other European leaders – even as five governments have fallen. As Stephen King, chief economist of HSBC, recently noted, “the eurozone is in danger of shifting towards a Ptolemaic system with Germany at its center…. It requires economic adjustment by others to protect the interests of German taxpayers and voters… [making] the system as a whole increasingly unstable.”

Because the EU is mainly an economic union, a new ordering of rules is significant. It has historic implications for Europe's values, civic health, geopolitics, and security.

When Mr. Sarkozy and Merkel decide the future, other nations feel left out. “Spain had to go along with the German project ... that wasn’t debated and in which [Spain didn’t] have a voice,” says Jose Ignacio Torreblanca of the European Council of Foreign Relations in Madrid. “That has a psychological effect. Either the markets or Germany dictate and … there is no common political project in which you have a buy-in.”

If Europe were a political union, a United States of Europe, the problem would not exist, New York Times columnist Paul Krugman argues. New York does not revolt against federal funds used to help Arizona. Debt is common and there's a Federal Reserve. But a "USE" is a nonstarter for Germany, and in a battle of weak and strong, Germany has the upper hand.

Spain's new conservative prime minister Mariano Rajoy got little sympathy from Brussels when he said that Spain would be unable to meet its EU deficit goal of 4.4 percent of GDP for 2012. Although he was eventually granted some leeway – the EU adjusted Spain's deficit target to 5.3 percent – the new target is still less than the 5.8 percent he requested.  

In normal times, in good economic weather, austerity would be OK, critics say. But there’s a severe demand problem. Austerity without growth, when Europe has 40 percent youth unemployment in some states, a credit crunch, and heavy debt repayment, may be too much. 

“German policymakers talk about discipline, about the Swabian housewife who [saves] ... and this is very sensible if the government is running a surplus,” Mr. Whyte says. “But even if Greece had delivered on all its reforms, it would still be in a terrible mess. Even if every EU government never violated fiscal rules, we’d still have a banking and debt crisis.”

Asian and South American debtor nations in the 1990s had the advantage of devaluing their currency, and thus could grow out of debt. Greece, Italy, Spain, Portugal, and other members of the single currency eurozone cannot devalue.

Jean Paul Fitoussi, a prominent political economist in Paris, says the treatment of Greece is so severe it raises questions about the underlying values of the eurozone enterprise. Asian states in the late 1990s, under severe International Monetary Fund (IMF) loan rules, were treated better.

"If Merkel changes her mind, other things could change," Mr. Fitoussi says. "But I don't think she will. Strengthening the German doctrine is what is making Germany the political leader of Europe … even though in economics, as in politics, might almost never makes right."

Nor has Germany itself held to its own doctrine of austerity in times of crisis. It was not held to such policies by Allied forces after World War II and it did not impose austerity on East Germany after the Berlin Wall fell in 1989. 

“If the Allies, and later the government of Germany itself, had practiced what the Germans are now preaching, Germany today would be a much poorer country,” says Robert Kuttner, editor of the American Prospect. He cites the political philosopher Edmund Burke, addressing King George III about the American colonists on the eve of the American Revolution: "The question with me is not whether you have a right to render your people miserable, but whether it is not your interest to make them happy."

Today Germany is a very reluctant leader of Europe, says a Scandinavian diplomat in Berlin. But at the same time, the diplomat adds, “it is too easy, and paradoxical, for Germany to preach austerity. Not everyone can export their way out of debt. Do the math. Not everyone can have surpluses, and demand in Europe is very far down.”

The German model derives from something called ordoliberalism, a German variant of neoliberalism. For Germans, it is responsible for the golden years of growth and recovery after World War II.

“Ordoliberalism is what Angela Merkel wants for the Eurozone as a whole: rigid rules and legal frameworks beyond the reach of democratic decision-making,” writes Princeton’s Jan-Werner Müller in the London Review of Books.

Yet the ordoliberal model comes out of Germany’s specific history; it won’t necessarily work universally, critics say. Austerity has the effect of hammering the European neoliberal system more firmly into place, says Santiago Zabala of the University of Barcelona. It works for the strong. The policies of the IMF, the European Commission, and the European Central Bank are not "racist," he says, but they are "metaphysically violent" since they banish and exclude any other ideas about the market.

"If for the benefit of the Union, we must submit to measures that inflict social injuries upon our weakest citizens," Mr. Zabala says, "it's worth asking whether the euro is worth saving."

German leaders have sold their policies based on Germany’s remarkable export success story, Whyte adds. The argument masks Germany’s own crying need for reform, he says. “Turning the eurozone into a larger version of present-day Germany would have adverse consequences… not just for Germany but also for Europe and the world economy.”