A Gaullist Germany: a review of recent books on the Euro crisis

The crisis of the Eurozone is now into its fifth year, yielding a harvest of books and commentaries. In this review, I’ll comment on those in the main that have been published in the English language.

The authors share a number of common positions: they all recount the history of the Euro’s genesis in terms of recurrent efforts in the 1920s, and then after 1945, to end the pattern of repetitive wars between France and Germany that have bedeviled European affairs since the days of Cardinals Mazarin and Richelieu. They all agree that the Maastricht Treaty, which laid the foundations for the European Central Bank and the single currency, involved high risks, in view of the histories of previous currency unions that fell apart from lack of a sufficiently strong and legitimate central power; and they concur that the original 11 members of Euro land, let alone the 18 which now belong, do not constitute an optimal currency zone.

All make the point therefore that the Maastricht Treaty was an unfinished business, requiring a good dose of optimism to be confident that the first crisis confronted by the new currency would provide a common incentive for all members to deepen their union by moving from monetary to a political, fiscal and banking union. All record the benevolent conditions of easy finance prevailing during the currency’s first decade, and rightly identify these as endogenous to the global economy. The crisis in the Euro zone, following on the financial crash in the United States in 2007-8, has, the authors suggest with varying degrees of emphasis, to be considered in terms of the rapid transformation of the world economy, following the implosion of the Soviet Union.

Indeed, most of the authors touch on the saliency of international affairs in the Euro crisis, again with differing emphasis. In particular, they record the evident fact that the crisis is directly related, if not attributable, to the fall out between France and Germany, on how to deal with the crisis.  For our authors, the possible solutions which they adumbrate depend on relations between Berlin and Paris: as Vicky Pryce, puts it, in her fluent account of the crisis from the perspective of the saga of Greek public finances, only France and Germany can fashion an answer. [1] Euro failure, she indisputably points, out has strengthened the UK’s Euroscepticism. But then Pryce goes on to argue that the UK has a crucial role in helping the Eurozone to reach a  “sensible” solution to its present travails.

It is when discussion of the solutions begin that the authors disagree. Their disagreements of course echo the profound differences between Paris and Berlin. Berlin, like Bonn is previous decades, defends the idea of a hard currency union, with devolved responsibility to member states for fiscal probity, while France consistently supports the idea of European solidarity, expressed in an EU-wide underwriting of government deficits and current account deficits, combined with a transfer union, where the richer members agree to earmark tax resources for redistribution to poorer members. In his highly readable account of the Euro’s genesis and development,  David Marsh quotes former Chancellor Schroeder as saying, “the logic of union is that the stronger help the weaker”. [2] A similar thesis is suggested by Carlo Bastasin, who argues that it is “national politics (which) nearly destroyed the Euro”, and that a political solution “at the European level” is “inevitable”.[3]

But these integrationist assumptions are challenged by none other than Otmar Issing, former Bundesbank board member and founding member of the Executive Board of the European Central Bank. Issing writes in his indispensible account of the birth of the Euro, that a political union which created a European welfare state, involving “welfare entitlements harmonized at a high level, and still tighter regulation of the labour market” would be incompatible with a stability oriented monetary union.[4] Johan van Overtveldt in his excellent book,[5] The End of the Euro: The uneasy future of the European union, summarizes this position in the title of his Chapter 4: The Endgame (It’s all in Germany’s Hands Now). In other words, it is not relations between Paris and Berlin that are crucial, but what is decided in Berlin.

This is definitely what the Chinese government thinks. To encapsulate Beijing’s perspective on the Euro crisis, Germany is now indisputably Europe’s hegemon, France is weakened, and the UK is marginal. This is to say the least a very different perspective to that of Bastasin, Pryce and Marsh, because it suggests that the solution to the Euro zone impasse has to be settled on German terms.

Why the Chinese take this position may well be because the regime, as one Spanish businessman explained to me in a series of interviews I was conducting on European business experiences in China, “ is Marxist-Leninist”. In other words, it speaks to itself and sees the world in the light of perspectives that are compatible with the Marxist-Leninist paradigm.

It is probably not by chance therefore that Costas Lapavitsas and his team of authors provide the best account of how Germany moved to hegemonic position in the European society of states during the first decade of the new millennium. His analysis, using the published economic date from the OECD and other sources, that the key to understanding why the countries on the periphery of the Euro zone suffer “in the shadow of Germany” is that the struggle for international competitiveness was played out on national labour markets. Simply, the German government, with business and trade union support, held down wages and consumption, and encouraged savings and rapid rises in labour productivity. [6] The result was that Germany built up a huge current account surplus, comparable to the surplus built up by China with the United States and the European Union, and the funds were recycled, especially through German and French banks to investments in the European periphery. The “markets” assumed that no foreign exchange risk meant no country risk.

But it would be a fallacy to propose that the strongest is destined to win in a major international contest such as is being played out globally and in the Eurozone. Brendan Brown, in his stimulating account from a Hayekian perspective, points out that, although Otmar Issing was in at the creation of the currency, the ECB did not take over the Bundesbank’s technical approach to management of the single currency, but had to negotiate with the French and Italian central bankers, who wanted a more growth oriented monetary policy stance. He then goes on to argue that when Jean-Claude Trichet took over at the helm of the ECB in 2003, the Frenchman backed the US insistence on the Chinese unpegging the yuan from the dollar, and in parallel embarked on  an expansionary monetary course in the Eurozone. For Brendan Brown, the cause of the Euro bubble was expansionary ECB policy under French direction. [7] “The clash between French monetary nationalism on the one hand and the German traditionalist vision of a union without economic government and transfer union is set to continue”.[8]

Interestingly Lapavitsas and his team agree, but from a very different perspective. The struggle in the Euro zone, they suggest, will not be resolved by mild reforms, which in effect impose austerity on working people across Europe but by promoting a radical change via “struggle” within the European union in favour of a European welfare state, and European minimum wage and European wide labour market regulation.

This is precisely what Otmar Issing and his fellows in Germany would fight tooth and nail. In other words, if the European left cohere for a European welfare state, as surely parts of the European left wish to do, the clash which Brendan Brown sees continuing between France and Germany is likely to be played out through a struggle within the European institutions, where the major dividing lines will be between international socialist loyalties and national social loyalties. And the key to which wins out will be the German trade unions.

Their dilemma is rather stark: on the one hand, they have pledged support to European integration and to the Euro project. On the other, it is the French who are pushing as always for a transfer of funds from Germany to the rest. As Thomas Mayer suggests in what this reviewer considers the best available book on the subject, the redistributive struggle within the Euro zone has always lain at the heart of Franco-German relations.[9]The European Payments Union (EPU) set up in the 1940s to redistribute surplus country funds to deficit countries was wound up in 1958, when the Bundesbank was just one year old. The Bundesbank, as I have argued elsewhere, in effect became Germany’s chief financial officer. [10] Collectivizing the Bundesbank within European institutions became the prime motive behind French foreign policy from 1969 onwards.

As Meyer rightly points, out given all the unsettled business in such an ambitious policy, the establishment of a single currency was a highly risky undertaking. Lord Lawson put it more bluntly: creating the Euro, the former Chancellor stated, was the most irresponsible political act since 1945. That may well prove to be the case, but short of Armageddon, the point must be made that, under the guise of “friendship” and “reconciliation”, the battle that was fought out on the fields of Flanders in the years 1914-18, and then again in 1939 to 1945,  has continued to be fought out in the details of the Euro policy process. Meyer has a very revealing chapter on the ECB’s TARGET mechanism, which he suggests in gentle irony, was surely not designed so that weak countries would have unlimited market access to unconditional loans to fund their balance of payments deficits, once private banks after 2008 were no longer read to lend to the peripheral countries. The answer he rhetorically requires, is, of course it was so designed. The implication is that the EU distinction between a “technical” and a “political” level of policy process has long since been revealed as fiction. Setting the details of the TARGET mechanism, or indeed of the ECB are political down to the last detail. And in the EU politics mean international politics combined with domestic. The battle to make Europe in the German or the French image has been joined since 2008, and that is why this Euro crisis is here to stay.

It is here to stay also because more than the future of the Euro is dependent on relations between France and Germany. The Euro crisis, as Meyer suggests without developing the point, reflects the structural shift in the global system that has been underway since, at the very latest, the end of the cold war and German unity. In the world, the major changes are the shrinkage of Russian influence,  the growing significance   of Brazil and India, and most importantly of all, the emrgence of China as a global power. This has gone along with a reduction in U.S. messianism, following the overreach of U.S. policy under President Bush Jr in the years 2000 to 2008.

In Europe, these seismic changes in the global structure, as well as its own chosen domestic responses to global competition, have propelled Germany to the position of hegemon in Europe.  As Meyer rightly points out, since German unity, German ardour for European integration has faded. Germany is no ready to subordinate German national interests to French leadership. Rather Germany has become a normal European nation state, pursuing its own national interests within the European institutions, and even more importantly, outside of them.

Germany’s calculation may be summarized thus: the only way to sustain German competitiveness in the world economy is for the Euro to become, and to stay, a hard currency zone, with no bailouts by rich of poor, combined with national responsibilities for budgetary balance. Germany is inviting its Euro partners to espouse a liberal market version of the social market economy.

France, on the other hand, can be expected to use very trick in the book to place Germany on a slippery slope to a gently inflationary Transferunion, which is the only possible way for France to reconcile its sticky labour markets with EU integration, let alone with open EU markets on the world.

In short, the Euro crisis is the expression of the re-assertion of the European power balance, regardless of the institutional fabric woven in the post-1945 years under the leadership of a momentarily prominent France, facing a dis-united Germany. That institutional fabric, predicated on the idea that Europe’s propensity to war is due to its kleinstaaterei, is now challenged by its prime beneficiary, Germany. As the Constitutional Court stated in its judgement on the Lisbon Treaty, the EU is a second order organization. It is the states that hold their legitimacy from their populations, which are the pillars of Europe’s new order. Germany has gone Gaullist. Europe will not be the same in the future.

That consideration, I suggest, should be the foundation of the UK’s foreign policies within and outside of the EU.

[1] Vicky Pryce, Greekonomics : The Euro crisis nand why politicians don’t get it, London, Biteback Publishing, 2012. P.136.

[2] David Marsh, The Euro : The Battle for the New Global Currency, New Have, Yale University Press, 2011(new edition).p.286.

[3]  Carlo Bastasin, Saving Europe: How National Politics Nearly Destroyed the Euro, Washington D.C. Borrkings, Institution Press, 2012.p. 134.

[4] Otmar Issing, The Birth of the Euro, Cambridge University Press, 2008(translated from the original German by Nigel Hulbert), p.p.242-243.

[5] Johan van Overtveldt i, The End of the Euro: The uneasy future of the European union, Chicago, Agate Publishing, 2011.

[6] Costas Lapavitsas et al, Crisis in the Euro Zone, London, Verso, 2012. The position is adumbrated in Part 1 : Beggar thyself and thy neighbour.

[7] Brendan Brown, Euro Crash, The exit Route from Monetary Failure in Europe .London, Palgrave MacMillan, 2012.

[8] Ibid. p.199.

[9] Thomas Meyer, Europe’s Unfinished Currency: The Political Economics of the Euro, London, Anthem Press, 2012.

[10] ‘Globalisation in the European Union and German Financial Reform: Political Economy of Finanzplatz Germany’, in: The New World Order in International Finance, ed. Geoffrey Underhill, MacMillan,1997.


About Jonathan Story, Professor Emeritus, INSEAD

Jonathan Story is Emeritus Professor of International Political Economy at INSEAD. Prior to joining INSEAD in 1974, he worked in Brussels and Washington, where he obtained his PhD from Johns Hopkins School of Advanced International Studies. He has held the Marusi Chair of Global Business at Rensselaer Polytechnic Institute, and is currently Distinguished Visiting Professor at the Graduate Schoold of Business, Fordham University, New York. He is preparing a monograph on China’s impact on the world political economy, and another on a proposal for a contextual approach to business studies. He has a chapter forthcoming on the Euro crisis. His latest book is China UnCovered: What you need to know to do business in China, (FT/ Pearson’s, 2010) (www.chinauncovered.net) His previous books include “China: The Race to Market” (FT/Pearsons, 2003), The Frontiers of Fortune, (Pitman’s, 1999); and The Political Economy of Financial Integration in Europe : The Battle of the Systems,(MIT Press, 1998) on monetary union and financial markets in the EU, and co-authored with Ingo Walter of NYU. His books have been translated into French, Italian, German, Spanish, Chinese, Korean and Arabic. He is also a co-author in the Oxford Handbook on Business and Government(2010), and has contributed numerous chapters in books and articles in professional journals. He is a regular contributor to newspapers, and has been four times winner of the European Case Clearing House “Best Case of the Year” award. His latest cases detail hotel investments in Egypt and Argentina, as well as a women’s garment manufacturer in Sri Lanka and a Chinese auto parts producer. He teaches courses on international business and the global political economy. At the INSEAD campus, in Fontainebleau and Singapore, he has taught European and world politics, markets, and business in the MBA, and PhD programs. He has taught on INSEAD’s flagship Advanced Management Programme for the last three decades, as well as on other Executive Development and Company Specific courses. Jonathan Story works with governments, international organisations and multinational corporations. He is married with four children, and, now, thirteen grandchildren. Besides English, he is fluent in French, German, Spanish, Italian, reads Portuguese and is learning Russian. He has a bass voice, and gives concerts, including Afro-American spirituals, Russian folk, classical opera and oratorio.
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