The dangers of a disgruntled Germany

By Katinka Barysch

Germany has finally agreed to help bail out Greece. The negotiations were acrimonious and took months. Angela Merkel’s hesitation and prevarication have increased the cost of the bail-out and unsettled financial markets. Politicians and commentators across the EU have accused Germany of being selfish and lacking solidarity with its EU partners. Germany feels isolated and misunderstood. The rift – if badly handled – could make Germany’s stance towards the EU more hard-nosed and inward-looking. Such a shift would change the way the EU works more than the Lisbon treaty ever could.

Berlin today is bristling with defiance. Germans are convinced that Angela Merkel’s strict conditions for the Greek bail-out will not only save German taxpayers’ money but are needed to prevent the eurozone from imploding. What is more, although Berlin’s PR policy has been wanting, German policy-makers and pundits are aggrieved that no-one in the other EU countries has made an effort to understand the domestic political realities that have shaped Merkel’s decisions.

The German press coverage about the bail-out has ranged from the doubtful to the visceral. Day after day, Bild Zeitung, the biggest tabloid, ran stories about Greeks retiring at 50 and dodging their taxes. The money that Germany will make available (€8.7 billion in the first year and up to €23 billion by 2012) is portrayed as a transfer not a loan. It will force the government to shelve promised tax cuts and curb social benefits, according to the media. A big majority of Germans are against any EU money for Greece, even if the country goes bust. The fact that there has been so little political leadership on the Greek crisis has allowed the media to dominate the public debate. Neither politicians nor the media have made much of an effort to remind Germans how much their country has benefited from the EU and the euro.

The public backlash against the bail-out came at a time when Germany was preparing for a pivotal election in the state of North Rhine-Westphalia on May 9th. If Merkel’s CDU and the FDP lose their majority there, their already strained coalition at the national level risks becoming dysfunctional. What’s more, the CDU / FDP coalition would lose their majority in the Bundesrat, the second chamber of parliament, which would force it to seek compromises with the opposition on all important pieces of legislation going forward. Hence Merkel’s desperate attempt to delay any decisions about Greece until after the election.

In April, three economists and a law professor announced that they would challenge any bail-out in the constitutional court. They claim that giving money to Greece violates both the no bail-out clause in the EU treaty and the 1993 verdict of the court that makes Germany’s participation in the euro conditional on stability being maintained in the eurozone. They want an injunction to stop the loan being disbursed while the court deliberates on its legality. The outcome of such a case is uncertain. But Germans have consistently rated their constitutional court the most highly respected institution in the land. No government could dare to do something that is in open contravention of a previous court ruling. That is why the government has worked so hard to make the bail-out watertight.

Merkel felt that her hands were tied by very real and immediate constraints. But her cautious and delayed reaction is also in line with a deeper shift in Germany’s European policies. In a European Union of 27, Germans no longer automatically assume that their national interest coincides with that of the Union. Since saving the Lisbon treaty in 2007, Merkel has shown no vision in her EU policies. For the generation of Helmut Kohl, the EU was a matter of war and peace, for Merkel it is one of costs and benefits. Her European policies are all about pragmatism and problem solving. But the absence of obvious allies makes finding European solutions harder: Merkel is disappointed by Commission President Jose Manuel Barroso and distrustful of French President Nicolas Sarkozy. There is also a clash in political style that accentuates disagreements between Germany and its partners. At home, Merkel’s tactic of tip-toeing towards feasible solutions has made her consistently popular. At the EU level, it clashes with Sarkozy and British Premier Gordon Brown, both prone to over-promise and under-deliver.

Many argue that Germany is becoming a ‘normal’ country in the EU and that is just fine. But it was exactly because Germany did not always behave like the UK and France that European integration moved forward and European solutions were possible. The country’s political elite is still wedded to the European project even though Germany is no longer willing to pay over the odds to make European compromises possible. The risk is that the Greek crisis brings a latent sense of frustration and disillusionment with the EU to the boil. It is hard to see how the EU could make progress on anything – whether it is services market liberalisation or a common energy policy – with a reluctant, grumpy and inward-looking Germany at its heart.

It is time for some damage limitation. Germany’s partners are right to point out the costs of Germany’s tardy response. But they need to show at least some understanding of Merkel’s domestic conundrum and acknowledge her efforts that have now made the bail-out possible. There were several EU countries that wanted tough conditions for Greece just as badly. They need to stop hiding behind Berlin. Others need to acknowledge that European solidarity also requires responsibility on the part of all EU member-states.

Berlin, in turn, needs to finally show some leadership now by pushing for sustainable solutions to the eurozone malaise. These do not only include tougher surveillance of, and sanctions against, eurozone countries that spend too much. The eurozone also needs a mechanism to deal with similar fiscal crises in the future. And it needs an open debate about the imbalances that threaten to undermine the euro and why Germany does not buy as much from its European partners as it sells to them.

Katinka Barysch is deputy director at the CER