Europe’s other “Germany problem”

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A few weeks ago, I wrote a story for TIME magazine about Germany’s role in Europe, and how its strong competitiveness was creating imbalances within the euro zone that were at the heart of the current European debt crisis. The solution to that “Germany problem” wasn’t easy – tough reforms in both Germany and its weaker neighbors. What’s become increasingly clear as well is that Europe has another sort of “Germany problem,” this one perhaps even more dangerous, and no easier to resolve. This “problem” is how German domestic politics are determining policy for the entire euro zone, and perpetuating its debt crisis.

We saw that problem quite clearly on Friday at the end of another, unsuccessful European summit. Despite persistent boasts that they have the tools in place to solve the debt crisis, the leaders of the euro zone still haven’t finalized exactly how they intend to finance the rescue fund created to do just that. And though they have agreed on expanding its size when a permanent rescue fund comes into operation in 2013, they didn’t pin down the exact details of funding that one, either. The zone’s finance ministers had reached a deal on that issue only days earlier, but after objections back in Berlin, Chancellor Angela Merkel showed up at the summit asking for a renegotiation. She wanted to reduce up-front capital contributions from member states to the new fund and spread out commitments over a longer period of time – yet another attempt to limit Germany’s exposure to the risks of solving the euro crisis. However, now the new fund might end up short of funds to engage in a large-scale bailout, with no clear mechanism for filling in the hole. Even Merkel admitted that things were left “a little bit open.”

Merkel’s decision to put domestic political concerns above the needs of the euro zone has been a persistent feature of the crisis since it began more than a year ago, and has been a key reason why the debt crisis has proven so hard to fix. Her reluctance to bailout Greece let the contagion genie out of the bottle and allowed the debt crisis to spread to other countries. Her resistance to proposals to stabilize the debt crisis that might increase Germany’s commitments to the euro – such as the idea of a Eurobond jointly backed by the zone’s governments – has prevented more comprehensive solutions to the crisis from emerging. Now, after agreeing to expand the euro rescue fund, she’s dilly-dallying on funding it. Meanwhile, Portugal stands in the brink of a bailout, which would make the country the third euro-user to require a rescue (after Greece and Ireland). The euro crisis burns while Berlin fiddles.

Merkel’s resistance to using German resources to help out her misguided euro zone neighbors is perfectly understandable. Greeks, Spanish and Irish don’t vote for her, the German electorate does, so her first priority is always going to be Germany’s needs. But the problem is that she controls the purse strings. Whatever bailouts might be needed, Germany, as the zone’s biggest economy, is going to end up on the hook for the largest share of the money. That means she’s effectively been calling all the shots. The problem here is that she’s deciding matters for the entire euro area based on her political concerns back home. And that is just not going to work.

That’s especially true because Merkel has been demanding tough reforms from the weaker countries of the euro zone while she waffles on helping them. With Berlin controlling the decisions, the euro zone’s entire approach to the crisis has been driven by German ideas. Berlin believes the solution to the euro zone’s woes is to make the struggling economies stronger and more competitive. The bailouts have come with painful austerity measures that will condemn recipient nations to several quarters, if not even years, of meager or no growth. Merkel has also pressed for a “competitiveness pact,” a form of which was approved earlier this month, which includes euro-zone guidelines for everything from retirement ages to wage growth. Germany has also been in favor of imposing tough fines onto countries that don’t meet deficit and debt targets. In other words, Berlin’s goal is the make its neighbors more German in their economic policies. In doing so, Merkel is imposing policies on other politicians that would seriously endanger their jobs. (The prime minister who arranged Ireland’s bailout has already gotten the boot, while Portugal’s PM resigned last week when he failed to get austerity measures through parliament.) But in return for all of those painful reform promises, Merkel is offering what? An unwillingness to accept commitments that could threaten her own job.

There is no indication that Merkel’s attitude will change. After her party lost ground in an election on Sunday in a state it usually dominates, there is instead every indication her position on euro issues will harden. Europe’s second “Germany problem” will only get worse.

A German friend pointed out to me a couple days ago that Angela Merkel is Chancellor of Germany, not Europe, and thus has Germany as her first concern. That’s true. But she insists on controlling European policy as if she is Chancellor of Europe, while crafting those policies as Chancellor of Germany. Merkel must either grasp her responsibility to the wider euro zone, or remain Chancellor of only Germany, and let someone else determine the direction of Europe.

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