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Analysis
As the Germans prepare for unpalatable decisions, the EMU virus is closing in on Berlin

As the Germans prepare for unpalatable decisions, the EMU virus is closing in on Berlin

by David Marsh

Mon 22 Aug 2011

The imposing but sometimes difficult-to-fathom edifice of Germany since the Second World War has been built on a central foundation of international politics: that the Germans should never have to take hard decisions in choosing between intrinsically contradictory alternatives. As a result of the growing, perhaps terminal strains in economic and monetary union (EMU), that foundation is now starting to crumble. In coming months, Germany may have to make an agonising choice: stable money or European integration.

Combining several different policy objectives in one over-arching strategy has been a pivotal tenet of successive German chancellors. Thus, before it combined with the Communist East in 1990, West Germany - under a doctrine set down by Chancellor Konrad Adenauer - managed to maintain the long-term goal of unification while upholding unambiguous alignment and cooperation with the US and democratic Europe.

Rather than choose between friendship with France on its western flank and partnership with Poland in the east – two countries overran and despoiled under the Nazis – Germany did both. EMU, forged in 1999 under a game plan set down by Chancellor Helmut Kohl and President Francois Mitterrand, afforded yet another example.

Extending the twin pillars of the post-war state - economic stability at home and political integration in the rest of Europe – Germany appeared to be exporting its stable money principles to the rest of Europe. Everyone looked likely to benefit.

The grand accomplishment was summed up in the slogan coined by Chancellor Kohl’s finance minister Theo Waigel: “We are bringing the D-Mark into Europe.” However, monetary union is a two way street. Germany exported its own currency, and it imported other people’s. The D-Mark was sent out on what appeared a successful conquest, but – while it was away – the drachma slipped in by a back door.

There has been a lot of talk of contagion. But the real infection has been borne by Germany. It displays the progressive debilitation of stronger nations coming under viral attack from the debts of uncompetitive smaller counties, whose trade deficits are automatically financed by German credits, which then have to be written down when the debtors can’t or won’t pay.

None of this really should have been a surprise. The Bundesbank has been warning for decades that, in monetary union, states form a “community of solidarity”, linked symbiotically together “for better or for worse”.

Last week’s meeting between President Sarkozy and Chancellor Merkel which brought more promises of “economic government” (called, unhelpfully, “economic direction” in German) predictably failed to calm the markets. Since there is no firm buyer of last resort to repel bond market contagion, the viral assailants are now closing in on Berlin. Many of Merkel’s natural supporters are uneasily aware that, were Germany and other creditor countries to submit to demands that they formally pool government borrowing with the other euro states, that could mark the gradual end of Germany’s own economic sanctity.
Wolfgang Reitzle, the well-regarded boss of industrial gas giant Linde, says he supports the euro “but not at any price.” Kurt Lauk, the head of the economic council of Merkel’s Christian Democrats, a former finance director of motor group Daimler and energy company Veba (the former Eon) even talks of a “currency reform” if euro support arrangements fail to work.

One of France’s goals in pushing for monetary union after the Berlin Wall fell was to weaken supposedly-dominant Germany – a goal with which Chancellor Kohl readily complied. If “economic government” together with common euro bonds becomes a reality, then President Mitterrand, from beyond the grave, will have achieved his goal.

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