The sovereign debt problems of Greece, Ireland and Portugal – all of which have sought a bailout from their eurozone partners, with Germany being primus inter pares in the club - are collectively portrayed in the United Kingdom as a crisis for the euro, with Germany at its centre, but is there any greater understanding in British Conservative circles as to the true nature and political motivation influencing Germany as a global power? How Germany, with its massive economy and Bundesbank prudential legacy reacts to this crisis as it asserts its new global confidence is the basis for this recent Bow Group paper by Ben Harris-Quinney and Christophe Scholer: "Whoever controls Germany controls Europe: why Britain must better understand the German mind"
If we take a historical perspective we like the Germans can see that currencies can survive the most fearsome buffetings and still emerge the other side. It is far too early in my opinion to read the last rites to the euro and even less so to predict the imminent unravelling of the entire EU project as some Conservatives are hoping for.
The euro, then, to my mind, is arguably not yet afflicted by a terminal existential crisis, though muddling through as is currently the case with no strong political leadership or sooner rather than later tough decision making, may well result in such a crisis. But for now the threat is no greater than that faced by the US dollar in the wake of the Wall Street Crash or the German mark during the hyperinflation of the Weimar Republic. Furthermore Germany, though clearly less euroenthusiastic than before, is not yet ready to abandon its cherished project which has hitherto served its economic interests well, and a return to the Deutschmark would severely penalise its export led economy as it would rapidly revalue. Those in the financial sector or political circles that are betting on the inevitable collapse of the eurozone, may yet have to face down the dogged resolve of Europe’s greatest economic power.
Does this mean business as usual in Berlin? No, it matters that Germany is currently in a transitional period where its decades-old political certainties and pillars of foreign policy are being severely shaken. This means that Germany will not exactly behave in accordance with a single preconceived and predictable pattern; it will hesitate, make U-turns and be inconsistent in the short term to protect its defined long term goals. The UK needs to realise quickly that Germany faces a period of great uncertainty, is looking for new international partners, and will be open and susceptible to external influences. This is an opportunity for greater dialogue between Germany and the UK, and the Brandenburg Gates have never been more open, but this is equally challenging, as other powers from the USA to Russia stake their often more significant claim on the ear of Berlin.
Some observers have argued that the current difficulties of some eurozone economies demand a renewed effort to centralise macroeconomic policy and regulation in Brussels with Eurobonds and full fiscal union. Already a consequence of the banking crisis has been the creation of new supervisory banking, insurance and securities structures at EU level to prevent a repeat of that crisis. The push for more EU 'economic governance' is also bound to lead to an enhanced role for the European Commission in monitoring member state's spending plans, with a much more stringent application of macroeconomic stability and growth pact criteria and heavy fines to enforce compliance as the existing eurozone Stability and Growth Pact was clearly not working, indeed Germany and France were amongst the first to flout these rules. In future repeated offenders will undoubtedly face severe financial sanctions including the threat of expulsion from the eurozone.
This is partly because Germany is mindful of its banks' overexposure to Greek debt which will if it defaults create a huge hole in their balance sheet, and Germany will not want to repeat this experience. When its efforts to restructure Greek bond payments were scuppered (on the basis of being a default in all but name), Germany sought to spread responsibility for the bailout throughout the eurozone – and even to Britain, which has rightly restricted its share only to its IMF contribution towards the second Greek bailout. However getting the European Financial Stability Facility and the long term IMF equivalent for Europe- the European Stability Mechanism- have still to be passed by all 17 countries' parliaments, some of which may resist this.
Whilst many Eurosceptics may balk at the thought of an EU powered by Germany it is important to consider the alternative. The eurozone, and the EU itself, simply could not survive without Germany, and moreover without the determination of the German government to save it. For many Conservatives in the UK such a collapse may be desirable politically, but it remains inescapable that such an event would herald the beginning of an economic depression the likes of which hasn't been seen in our lifetime, hence the paradoxical calls by Conservative Chancellor George Osborne for an accelerated Eurozone fiscal union.
In the medium term, if the UK can retain much of its sovereign power with limited fiscal responsibility via the IMF in Europe, whilst Germany continues to underwrite the eurozone, it should be considered a compromise worthy enough to be made if it at least enables the UK to weather the storm of economic turmoil. Osborne was quite unequivocal on the eurozone crisis in his comment " A disorderly outcome would be disastrous for everyone, including Britain, so we should allow greater integration to happen, while ensuring we are not part of it and our own national interests are protected”. In the long term our ability to work closely with and better understand Germany now will prove invaluable in ensuring that, following a resolution to the eurozone crisis, hopefully an EU more realist in terms of power ambitions, economically rather than politically driven and responsible in its economic governance emerges, in opposition to the increasingly political, ideological and bureaucratic entity we have all become so familiar with.
No-one knows for sure the outcome of all this turbulence. But if the euro survives, it is likely to emerge stronger than ever particularly if the weaker economies such as Portugal, Ireland and Greece peel away. It will then vie with the dollar for the title of the world's reserve currency of choice. Indeed, unless the US starts grappling with its own mountainous deficit (overall greater than the Eurozone's as ECB Governor Jean-Claude Trichet pointed out to US Treasury Secretary Tim Geithner) and reducing a black hole of unfunded welfare and pension entitlements, the euro could well rival the greenback in its position at the apex of the global financial system, which China would also support with its almost 3 trillion US dollars of reserves which it wants desperately to diversify away from. British Conservatives wish the German led single currency political project well, as its implosion would negatively, perhaps even catastrophically, impact on our country given our own economic fragility and current austerity program. Unsurprisingly we in Britain rightly prefer the flexibility of setting our own interest rates and currency value and in short safeguarding our economic and ultimately political sovereignty. However understanding German domestic and foreign policy priorities as this paper seeks to do is in the best internationalist tradition of the Bow Group and is vital to our own economic and foreign policy interests, and I commend the authors in producing this important timely document.