Twenty-five Years after the Fall of the Wall
Non-Resident Senior Fellow
Klaus-Dieter Frankenberger is non-Resident Senior Fellow at AICGS.
When history was about to turn the corner at the end of the 1980s and German unification shot to the top of the international agenda, not everybody was cheering. British Prime Minister Margaret Thatcher was one of the boo-birds. The prime minister was no fan of Germany in the first place and she distrusted Germany’s future ambitions. Italian Prime Minister Giulio Andreotti was fond of saying that he loved Germany so much that he preferred to have two of them.
Thatcher and Andreotti were not alone in fearing a reunited Germany that would reassert itself and eventually later dominate Europe. Actually, during the winter of 1989, West German leaders received some disheartening news: they could count on only a few countries to fully support the national aspiration, including the United States and Spain. The critics saw a new German hegemon rising on the horizon, and some even envisioned jack-booted troops marching through the streets again. To reassure them, West German Chancellor Helmut Kohl was ready to give up the Deutsche Mark, the very symbol of West Germany’s postwar rebirth. A fully integrated Germany would not pose a threat to anybody, the wings of the powerful Bundesbank would be clipped, and all would be fine and dandy in Europe and later in the monetary union.
Fear and Doubt as Germanys Integrate
Some twenty years later, during the sovereign debt and euro crises, there has been endless talk about Germany’s economic strength and newly gained political clout. Some have praised German leadership in setting the European agenda. Others criticized Germany for its strong-arm tactics and orthodox policy prescriptions. Some admired Germany’s strength. Others loathed it. Whatever the perspective, the fact that Germany had become the dominant power in Europe was and is more or less undisputed. Angela Merkel, the German chancellor, was called “Queen of Europe” and “Boss of Euroland.” Imagine what Mrs. Thatcher might have thought about this!
This development has had consequences. It has contributed to a fundamental identity crisis in France, since the old Franco-German understanding at the heart of European integration had become obsolete. The divisions in Europe were all too visible: a prosperous and competitive north with Germany as its anchor and an underperforming south drowning in debt. And, in general, a European Union that was punching way below its weight. While the EU came across as less forceful and coherent, with its very existence on the line, leaders of major member states took center stage. This has not changed much. Europe still struggles with economic growth. And if this were not enough, we see neo-nationalists and anti-European populists on the rise in many European countries tearing at the old pro-European consensus.
Political Sacrifice for a Prosperous, Competitive Economy
Actually, Germany’s strength was not preordained. When the unification party was over, the price of unification became clear. It would take a long time and cost an awful lot of money to modernize East Germany and integrate it into West Germany. West Germany’s economy also had its own set of problems to address as well. New taxes were introduced. Hundreds of thousands of East Germans moved west. In the late 1990s, Germany was being called the “sick man of Europe.” Growth stalled, and more than 5 million people were unemployed.
It took a Social Democrat, Gerhard Schröder, to prevent the listing ship from sinking. While the United States went to war in Iraq, Chancellor Schröder announced the biggest reform of the welfare state since the early days of the Federal Republic. Welfare reform, new labor market laws, aggressive measures by business to raise productivity and many years of wage restraint set Germany on a course for renewal. Schröder paid a political price for his courage, as his so-called “Agenda 2010” was bitterly opposed by the political left and the rank and file members of his own party; he lost the chairmanship of the Social Democrats and was ultimately kicked out of the Chancellery, replaced by Angela Merkel, the Christian Democrat from East Germany.
Ultimately, his reform program worked well. While other European countries lived beyond their means amid record low interest rates that were a welcome side effect of the new common currency, Germany started to boost its productivity and competitiveness. So, when the fiscal and euro crisis struck, the stage was set for a schism in Europe that was both economic and political. The dispute was over principles, the future of Europe, and the euro—nothing less.
The Roots of Economic Tension within Europe
This debate pitted Germany and a few others like the Netherlands and Finland against Greece, Italy, and other spendthrifts in the monetary union. France was sometimes in the middle, but its sympathies were clearly with Europe’s southern countries. This is still true today. Many in the French elite denounce budget consolidation as a German obsession. But Germany was steadfast in insisting on budget cuts, a restructuring of the welfare state, and major economic reforms as conditions for further assistance—i.e., cheap credit. People in hard-hit countries, in Greece or in Spain, rallied against what they called austerity policy and the villain in the club, Germany. It became the scapegoat. Merkel was unmoved: no reform, no help.
Eventually, Europeans reached agreement on mechanisms to at least manage the sovereign debt crises. This so-called bailout was actually prohibited in the treaties governing monetary union. As Merkel was clearly aware of the dangers that would have come with the disintegration of the euro zone, she agreed to the new rescue mechanism. She said repeatedly, not the least to sway a wary German public, “If the euro fails, the EU will fail, too.” The bailout was highly unpopular in Germany. Domestic critics challenged the government more than once before the Constitutional Court. The government deserves credit for persuading an angry public to understand that there was a price to be paid if we were to keep the euro and the monetary union. Merkel reassured the voters so much that she was awarded a third term in 2013.
Unpleasant Truths: Europe is Home to Many Cultures, Traditions, and Philosophies
The crisis years have pulled the cover off of facts that may not have surprised experts, but are politically unpleasant, nevertheless. For example: the euro was originally meant to be an instrument for economic convergence. But, in reality, it has driven countries apart. A clash of cultures has occurred. Different mentalities, traditions, and philosophies led to disagreement over recommendations and to policy disputes. While Germans’ paramount interest lies in monetary stability and sound public finances, other countries have different perspectives. Old stereotypes resurfaced as well, including dark images from the Nazi era. We loathed the Greeks for jeopardizing the euro. They hated us for the pain inflicted upon them as a remedy for the malaise.
Tensions took hold of the Franco-German relationship as well. In the past, Germany sought shelter behind France to hide its economic strength. France liked this because it covered up its weaknesses. The crisis, however, deepened and broadened the divide between the two.
What will this mean for Europe in political terms? And how will the euro be impacted? In economic terms, France has fallen further behind, while Germany has become the top supplier of state-of-the-art products to emerging markets. Parts of Europe suffered. Germans, with their difficult years behind, did not suffer much. In just one reflection of this, unemployment plunged.
Even Germany Has Made Economic Blunders
But does this mean that all is well in Germany, the world’s fourth largest economy? No, not at all. In a new book called “The German Illusion,” economist Marcel Fratzsch castigates the country for its self-indulgence. He comes down hard on the government for declining to invest in infrastructure and failing to encourage private investment. He, like many others, criticizes the government for re-expanding the welfare state—higher pensions, a national minimum wage, proposed rent control.
Frantzsch takes business to the woodshed, too. Why? Because major German companies invest more in Eastern Europe, Asia, and the United States than in the euro zone. Contrary to what many Germans think, the country is obviously not an island of tranquility amid a struggling Europe. It is not immune to global trends, and unwise policy decisions aggravate the situation. The energy transformation is still a work in progress—to be precise: fewer progress, more mess. And we currently see more labor unrest than we have had in a long time
Last August, we had record high employment with 42.7 million people officially working and unemployment down to 6 percent or less, depending on the statistical method used. In 2013, German exports reached more than €1 trillion, with an annual current account surplus of €260 billion, an all-time high. But August brought bad news, too. Coming after months of declining business sentiment, production in manufacturing declined and exports fell considerably. Actually, exports dropped by more than 8 percent, the biggest drop since January 2009. In other words, being the supplier for emerging markets like China is fine. But when the emerging markets stall or when geopolitical conflicts flare up as Ukraine has, then interdependence turns out to be a liability. And growth forecasts have to be corrected. In 2014, we will be happy if growth inches above the 1 percent level. Economists fear that Europe’s economic powerhouse is running out of gas. But Europe needs the German locomotive. Some want it to forget about deficit control and spend more so that demand will grow. We will see. In any case, it is indeed high time to think about an “Agenda 2020,” a new reform agenda that would, among other things, deregulate the service sector.
Three weeks ago, commemorating the 24th anniversary of unification on October 3, Merkel called unification a huge success story: “When 96 percent of East Germans under the age of 30 say they personally benefitted from unification, then we did a lot of things right.” This is true. It may have cost a lot, but this is all well and good. But it is no reason to rest on our laurels. We should subject ourselves to the same rigor that we demand of others, because the world out there is an ultracompetitive one. This is exactly the gospel Merkel has been preaching.
All of Europe Must Be Strong to Succeed
There is also a larger task: Given Germany’s economic clout, our partners also expect us to provide leadership on security matters and carry the burden that comes with power. The country—its political leadership, to be precise—is willing to carry more of this burden and transition from a culture of restraint to a culture of responsibility.
While this is highly welcome, we need not forget the underpinnings of leadership: economic strength, innovation, and dynamism and strong and capable military forces, including planes that are ready to fly, choppers that are ready to take off, and troops who are ready to engage. When it comes to military preparedness and military capabilities, Germany’s record is pretty dismal. It could and should do more to bolster European defense and agree on a common European defense policy. To put it simply, we need to spend more on defense!
We also need to be aware of the fact that it is politically unhealthy and unwise to have a European Union that is made up of a strong Germany (and well-to-do-countries in the north) and a lot of underperforming members. This situation creates tensions and breeds resentment. Germany does not like to be called a hegemon, a term that I think is a false characterization anyway. Nor does it like to be seen as a villain who stubbornly ignores calls to boost growth by spending more. But here is the dilemma: There may be room for more growth-stimulating measures, but most Germans believe fiscal discipline is both a virtue and a condition for sustaining growth in the long run. The government still aims for a balanced budget in 2015. It would be the first time in decades we would not incur new debt. So some disputes will not go away.
Looking Forward to Economic Opportunity: TTIP
So much is clear: Since the fall of the Wall twenty-five years ago, Germany has changed in many ways. It has become more international and outward looking and, for the most part, economically stronger. On the basis of this record, its partners and friends expect Germany to shoulder even more responsibility. It should assume this role for the benefit of Europe and the West and for itself.
It could and should be, for example, a staunch advocate of the Transatlantic Trade and Investment Partnership (TTIP). This partnership would benefit us all, not just economically, but also politically and even strategically as it would provide a firm underpinning for the relationship across the Atlantic. It would help to provide the cement for the Atlantic community in the twenty-first century. Even though this would create a win-win situation, TTIP faces concerns, resistance, and demonization fuelled not the least by a good dose of anti-Americanism in Germany. It is high time that all those who wish Germany to succeed and Europe to prosper step out and take on the challenge in front of them.
Klaus-Dieter Frankenberger is the Foreign Editor for the Frankfurter Allgemeine Zeitung.