The German question

Over the last few months, Germany has been getting a lot of flak. To many observers, the euro crisis has revealed a more inward-looking and nationalistic Germany that is pursuing its national interests more aggressively than before. For example, a couple of weeks ago the philosopher Jürgen Habermas wrote of a “solipsistic mindset” in Germany. In the new issue of the magazine Cicero, which came out yesterday, another éminence grise, the former chancellor Helmut Schmidt, accused Angela Merkel of “Wilhelmine pomposity”. I agree that there is a profound, and in some ways worrying, shift taking place in German foreign policy. But, as I argue in an essay in the July issue of Prospect, which comes out today, it is a complex shift that actually goes back beyond Merkel to the “red-green” government of Gerhard Schröder. I also think the references to the Kaiserreich are a little misleading. If Germany is becoming more nationalist, it is in a quite different way than in the nineteenth century.

The debate about the euro crisis – and the criticism of Germany – has intensified even further ahead of the G20 summit in Toronto this weekend. The critics say that by not only insisting on strict fiscal discipline for weaker eurozone countries but also reducing its own deficit, Germany is actually making it harder for the southern Europeans to grow their way out of recession. That, for example, was the thrust of George Soros’s criticism of German policy in his speech at the Humboldt University in Berlin yesterday. Soros said he feared that by imposing its preference for fiscal discipline on weaker eurozone countries, Germany was in danger of creating a “downward spiral” that is “liable to push Europe into a period of prolonged stagnation or worse” and endangering the future not just of the single currency but of the European Union itself. Many Germans, on the other hand, see the Keynesian course of action advocated by Soros as essentially reckless. German finance minister Wolfgang Schäuble said in today’s FT that “we take the longer view and are, therefore, more preoccupied with the implications of excessive deficits and the dangers of high inflation.”

One thing I don’t fully understand is what exactly is driving Germany’s insistence on strict – and, in the view of the critics, excessive – budgetary discipline. One possibility that is frequently mentioned is that, as a result of the collective memory of hyperinflation in the 1920s, Germans have an exaggerated fear of inflation. As Soros put it in his speech, Germany is still “traumatized by two episodes of runaway inflation” and is therefore “allergic to any buildup of inflationary pressures”. But Germany also has good economic reasons for fearing inflation much more than others in the eurozone. Germany’s manufacturing economy relies on exports, increasingly to emerging economies like China, and therefore needs to keep wages down in order to remain competitive. In this sense, Germany’s allergy to inflation is entirely reasonable, if perhaps a little selfish. Put simply, is Germany being rational or irrational?

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