The Costs and Benefits of a German Straitjacket

deutschland uber alles.jpgDuring the years following the fall of the Berlin Wall, Germany traded the geostrategic insecurity of a Cold War fault line and divided nation for a unified country with high levels of economic tension.  The transfer payments from the West to the East were politically and economically stressful.  The costs of reunification helped compel a rebalancing of accounts, a reduction in Germany's social welfare framework alongside renewed investment in its manufacturing and export sector.  China's mercurial growth and juggernaut manufacturing platform has been built in large part on German machine tools and equipment -- hitching Germany's economic fortunes to China's rising star.

Germany might have chosen not to trim its entitlement outlays to students, retirees, and displaced workers and to instead dig a deeper fiscal hole like many European countries.  For the most party, the German government chose to tilt toward austerity and investment, and the bets it made have largely paid off in the sense that it stands with China, Japan, and various of the Middle East oil states as a leading export-dependent, "surplus nation" while much of the rest of the global economic order wallows (or may be drowning) in debt.

In the Eurozone, however, Germany's success may ultimately lead to the unraveling of the economic and political binds that have tied Europe together.  

Germany, despite moments of leadership in the Euro crisis, has mostly been a 'euro late and kilo short' throughout the crisis.  As former Treasury Secretary Robert Rubin stated at the recent Washington Ideas Forum (sponsored by The Atlantic and Aspen Institute), European economic officials "have not done what needed to be done to get in front of the crisis."   Martin Wolf, the globally followed chief economics correspondent and Associate Editor of the Financial Times, has said that "Germany has not recognized its hegemonic responsibilities."  

While the European Central Bank has the authority and resources to guarantee $5 trillion across the financial institutions of Europe, the absence of centralized political authority has plagued and aggravated the financial crisis.  Germany is emerging as the nation that matters more than all others.  It is establishing itself as the central authority -- and that power is compelling other states into downward spirals of austerity and collapsed demand.

Now French President Nicolas Sarkozy has said that France must copy Germany and said "We have to repay our debts and work harder and better."  Sarkozy's conservative economic confidant and adviser Alain Minc, as reported by the Financial Times, has offered the remarkable comment:  "Finally the French people have been told what they have not been told for 30 years.  That the criteria for good economic management are the German criteria."

Many Germans resent the less efficient, seemingly more slothful, and economically reckless nations with which they share a currency and feel that they are being forced into a replay of the transfer payment misery of the 1990s -- this time not for their Eastern German brothers, sisters and cousins, but for Europeans who speak different languages and are distinct from German culture and history.

While political and media tributes abound at the moment for German Chancellor Angela Merkel's tactical decisiveness in the most recent Greece private debt write-off deal, few think that this is the end of the high stakes roller coaster ride.  Italy's borrowing rates actually surged to record highs after the Greece deal was announced -- not a sign of confidence that the destructive debt floodwaters had crested.  More importantly, German prescriptions that its European brethren need to don a "German straightjacket" and slash debt and consumption is a deeply flawed course.

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Steve Clemons is Washington editor at large for The Atlantic and editor of Atlantic Live. He writes frequently about politics and foreign affairs. More

Clemons is a senior fellow and the founder of the American Strategy Program at the New America Foundation, a centrist think tank in Washington, D.C., where he previously served as executive vice president. He writes and speaks frequently about the D.C. political scene, foreign policy, and national security issues, as well as domestic and global economic-policy challenges.

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