Germany's Role in Europe and the European Debt Crisis
George Friedman
Geopolitical Intelligence Report
February 1, 2012
Special Report
The German government proposed last week that a European commissioner be appointed
to supplant the Greek government. While phrasing the German proposal this way might
seem extreme, it is not unreasonable. Under the German proposal, this commissioner
would hold power over the Greek national budget and taxation. Since the European
Central Bank already controls the Greek currency, the euro, this would effectively
transfer
control of the Greek government to the European Union, since whoever controls
a country's government expenditures, tax rates and monetary policy effectively controls
that country. The German proposal therefore would suspend Greek sovereignty and
the democratic process as the price of financial aid to Greece.
Though the European Commission rejected the proposal, the concept is far from dead,
as it flows directly from the logic of the situation. The Greeks are in the midst
of a financial crisis that has made Greece unable to repay money Athens borrowed.
Their options are to default on the debt or to negotiate a settlement with their
creditors. The International Monetary Fund (IMF) and European Union are managing
these negotiations.
Any settlement will have three parts. The first is an agreement by creditors to
forego repayment on part of the debt. The second is financial help from the IMF
and the European Union to help pay back the remaining debt. The third is an agreement
by the Greek government to curtail government spending and increase taxes so that
it can avoid future sovereign debt crises and repay at least part of the debt.
Bankruptcy and the Nation State
The Germans don't trust the Greeks to keep any bargain, which is not unreasonable
given that the Greeks haven't been willing to enforce past agreements. Given this
lack of trust, Germany proposed suspending Greek sovereignty by transferring it
to a European receiver. This would be a fairly normal process if Greece were a corporation
or an individual. In such cases, someone is appointed after bankruptcy or debt restructuring
to ensure that a corporation or individual will behave prudently in the future.
A nation state is different. It rests on two assumptions. The first is that the
nation represents a uniquely legitimate
community whose members share a range of
interests and values. The second is that the state arises in some way from the popular
will and that only that popular will has the right to determine the state's actions.
There is no question that for Europe, the principle of national self-determination
is a fundamental moral value. There is no question that Greece is a nation and that
its government, according to this principle, is representative of and responsible
to the Greek people.
The Germans thus are proposing that Greece, a sovereign country, transfer its right
to national self-determination to an overseer. The Germans argue that given the
failure of the Greek state, and by extension the Greek public, creditors have the
power and moral right to suspend the principle of national self-determination. Given
that this argument is being made in Europe, this is a profoundly radical concept.
It is important to understand how we got here.
Germany's Part in the Debt Crisis
There were two causes. The first was that Greek democracy, like many democracies,
demands benefits for the people from the state, and politicians wishing to be elected
must grant these benefits. There is accordingly an inherent pressure on the system
to spend excessively. The second cause relates to Germany's status as the world's
second-largest exporter. About 40 percent of German gross domestic product comes
from exports, much of them to the European Union. For all their discussion of fiscal
prudence and care, the Germans have an interest in facilitating consumption and
demand for their exports across Europe. Without these exports, Germany would plunge
into depression.
Therefore, the Germans have used the institutions and practices of the European
Union to maintain demand for their products. Through the currency union, Germany
has enabled other eurozone states to access credit at rates their economies didn't
merit in their own right. In this sense, Germany encouraged demand for its exports
by facilitating irresponsible lending practices across Europe. The degree to which
German actions encouraged such imprudent practices -- since German industrial production
vastly outstrips its domestic market, making sustained consumption in markets outside
Germany critical to German economic prosperity -- is not fully realized.
True austerity within the European Union would have been disastrous for the German
economy, since declines in consumption would have come at the expense of German
exports. While demand from Greece is only a small portion of these exports, Greece
is part of the larger system -- and the proper functioning of that system is very
much in Germany's strategic interests. The Germans claim the Greeks deceived their
creditors and the European Union. A more comprehensive explanation would include
the fact that the Germans willingly turned a blind eye. Though Greece is an extreme
case, Germany's overall interest has been to maintain European demand -- and thus
avoid prudent austerity -- as long as possible.
Germany certainly was complicit in the lending practices that led to Greece's predicament.
It is possible that the Greeks kept the whole truth about the Greek economy from
their creditors, but even so, the German demand for suspension of Greek national
self-determination is particularly striking.
In a sense, the German proposal merely makes very public what has always been the
reality. For Greece to have its debt restructured, it must impose significant austerity
measures, which Athens has agreed to. The Germans now want a commissioner appointed
to ensure the Greek government fulfills its promise. In the process, the debt crisis
will profoundly circumscribe Greek democracy by transferring fundamental elements
of Greek sovereignty into the hands of commissioners whose primary interest is the
repayment of debt, not Greek national interests.
The Judgment of Athens
The Greeks have two choices.
First, they can accept responsibility for the debts
on the terms negotiated and accede to the constraints on their budget and tax discretion
whether imposed by a commissioner or by a less formal structure. Second, they can
default on all debts. As we have learned from corporate behavior, bankruptcy has
become a respectable strategic option. Therefore, the Greeks must consider the consequences
of simply defaulting.
Default might see them frozen out of world financial markets. But even if they don't
default, they will be present in those markets only under the most constrained circumstances,
and to the primary benefit of creditors at that. Moreover, as many corporations
have found, borrowing becomes more attractive after default, as it clears the way
to new post-default debt. It is not clear that no one would lend to Greece after
a default. In fact, Greece has defaulted on its debt several times and managed to
regain access to international lending.
More significantly, defaulting would allow Greece to avoid fueling its internal
political crisis by forfeiting its national sovereignty. Much of the political crisis
inside of Greece stems from the Greek public's antipathy to austerity. But another
part, which would come to the fore under the German proposal, is that the Greeks
do not want to lose national sovereignty. In their long history, the Greeks have
lost their sovereignty to invaders such as the Romans, the Ottomans and, most recently,
the Nazis. The brutal German occupation still lives in Greek memories. The concept
of national self-determination is thus not an abstract concept to the Greeks. Its loss plus austerity imposed by foreign powers would create a domestic crisis in
which the Greek state would be seen as an economic and political enemy of Greek
national interests along with the commissioner or some other mechanism. The political
result could be explosive.
It is unclear if the Greeks will opt not to default. The certain price of default
-- being forced to use their national currency instead of the euro -- actually would
increase national sovereignty. There will be economic pain if the Greeks continue
with the euro, and there will be economic pain if the Greeks leave the euro; the
political consequences of losing sovereignty in the face of such pain could easily
be overwhelming. Default, while painful to Greece, might well be less painful than the alternative.
The German Dilemma
The Germans are caught in a dilemma. On the one hand, Germany is the last country
in Europe that could afford general austerity in troubled states and the resulting
decline in demand. On the other hand, it cannot simply tolerate Greek-style indifference
to fiscal prudence. Germany must have a structured solution that to some degree
maintains demand in countries such as Spain or Italy; Germans must show there are
consequences to not complying with the orderly handling of debt without default.
Above all, the Germans must preserve the European Union so they can enjoy a European
free-trade zone. There is thus an inherent tension between preserving the system
and imposing discipline.
Germany has decided to make an example of the Greeks. The German public largely
has bought into Berlin's narrative of Greek duplicity and German innocence. German
Chancellor Angela Merkel has needed to frame the discussion this way, and she has
succeeded. The degree to which the German public is aware of the complexities or
the consequences of a generalized austerity for Germany is less clear. Merkel must
now satisfy a German public that questions bailouts and sees Greece as simply irresponsible.
Capitulation from Greece is necessary for her as a matter of domestic politics.
The German move into questions of sovereignty has raised the stakes in the debt
crisis dramatically. Even if the Germans simply back off this demand, the Greek
public has been reminded that Greek democracy is effectively at stake. While Greece
may have borrowed irresponsibly, if the price of that behavior is yielding sovereignty
to an unelected commissioner, that price not only would challenge Greek principles,
it would bring Europe to a new crisis.
That crisis would be political, as the ongoing crisis always has been. In the new
crisis, sovereign debt issues turn into threats to national independence and sovereignty.
If you owe too much money and your creditors distrust you, you lose the right to
national self-determination on the most important matters. Given that Germany was
the historical nightmare for most of Europe, and it is Germany that is pushing this
doctrine, the outcome could well be explosive. It could also be the opposite of
what Germany needs.
Germany must have a free-trade zone in Europe. Germany also needs robust demand
in Europe. Germany also wants prudence in borrowing practices. And Germany must
not see a return to the anti-German feeling of previous epochs. Those are several
needs, and some of them are mutually exclusive. In one way, the issue is Greece.
But more and more, it is the Germans that are the question mark. How far are they
willing to go, and do they fully understand their national interests? Increasingly,
this crisis is ceasing to be a Greek or Italian crisis. It is a crisis of the role
Germany will play in Europe in the future. The Germans hold many cards, and that's
their problem: With so many options, they must make hard decisions -- and that does
not come easily for postwar Germany.
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