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Tensions Over Germany's Euro Role

Author: Christopher Alessi
March 5, 2012

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The sense in some eurozone peripheral countries that Germany controls their destinies has bred deep resentment, complicating the ability of Europe's economic powerhouse to lead the EU through its sovereign debt crisis. Greeks have railed against German "economic occupation" as activists burn German flags in front of the Athens parliament and newspapers publish images of Chancellor Angela Merkel dressed as a Nazi. Fury directed at Germany (Guardian) has been mounting in response to German-mandated austerity measures agreed to by the Greek government on February 21 in exchange for a second $172 billion EU-IMF bailout package. Ireland, another eurozone state that received an EU bailout, has also voiced frustration over Germany's leaking of a European Commission report on Ireland's finances (Bloomberg) to lawmakers.

What's at Stake

Germany has been reluctant to assume the spotlight (LAT) on the European stage, yet the growing perception that it is an austerity-obsessed, economic hegemon has arguably weakened European solidarity and the continent's ability to collectively combat the debt crisis. "It is problematic that the German debate [over austerity] has decoupled from the rest of Europe. In this way, old grievances might erupt again," Sebastian Dullien of the European Council on Foreign Relations told CFR.org.

Germany's leadership is vital to salvaging the single currency and overcoming a sovereign debt crisis that has rattled markets and threatened to bring down the global economy. The German-engineered EU fiscal compact, signed in Brussels on Friday, could go a long way toward preventing future debt crises while fueling further European integration.

The Debate

In addition to Greek popular outrage, EU officials are also questioning Germany's approach to the euro crisis. Italian Prime Minister Mario Monti has increasingly called on Merkel to temper her austerity rhetoric by making growth a component of Europe's recovery (Bloomberg). Meanwhile, the European Commission, as well as the IMF and the United States, have urged Merkel to drop her resistance to expanding the EU's bailout fund (CSM) to create a bigger financial firewall to reassure markets.

However, many Germans argue that their EU compatriots do not appreciate the financial sacrifices they have already made to help their indebted neighbors. "Germany bears a major burden in having to overcome a crisis that others got themselves into," notes an editorial in Germany's Frankfurter Allgemeine Zeitung. "The fact that it insists on budget discipline doesn't undermine democracy in the debtor countries: It is the logic of life in the currency union."

Policy Options

Germany's austerity strategy, which includes strict government spending cuts and tax increases, is part of a larger effort to "foster competitive-enhancing structural reforms," Jean Pisani-Ferry, the director of Brussels-based Bruegel, told CFR.org. While he thinks that the plan has worked in alleviating the euro crisis, Pisani-Ferry cautions, "Berlin may have overestimated the complementarities between budgetary consolidation and reform."

The ECFR's Dullien is more skeptical of the German focus on austerity: "As we have seen in the post-World War II order--and especially in the case of the USA--an economic hegemon needs to accept current account deficits and needs to be willing to run stabilization policies."

Background Materials

This CFR Backgrounder explains the history of post-war European integration and the causes of the continent's recent sovereign debt crisis.

The European crisis is a mere foretaste of the central political debate of the first half of the twenty-first century: how to resolve the tension between global markets and national politics, argues Kemal Dervis for Project Syndicate.

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