Appeared, in an abbreviated version, in Le Monde diplomatique, May 2015. Italian translation appeared in il Mulino 4/2015 (PDF here).
Germany’s new European hegemony is a product of European Monetary Union in combination with the crisis of 2008. It was not Germany, however, which had wanted the Euro. Its export industries had since the 1970s lived comfortably with repeated devaluations of the currencies of Germany’s European trading partners, in response to which much of German manufacturing moved out of price-sensitive into quality-competitive markets. It was above all France which sought a common European currency, to end the felt humiliation of having to devalue the Franc against the Mark and, after 1989, to bind united Germany firmly into a, hopefully French-led, united Europe. From its conception the Euro was a highly contradictory construction. France and other European countries, such as Italy, were tired of having to follow the hard-currency interest rate policy of the Bundesbank, which had de facto become the central bank of Europe. By replacing the Bundesbank with a European central bank, they expected to recapture some of the monetary sovereignty they felt they had lost to Germany. Clearly the idea was also to make monetary policy in Europe less obsessed with stability and more accommodating of political objectives like full employment. At the same time, Mitterand and his Finance Minister Jacques Delors, but also the Bank of Italy, hoped to gain political clout against national Communist parties and trade unions by foreclosing external devaluation and thereby forcing the Left to renounce its political-economic ambitions under the constraints of a harder if not hard currency.
In Germany the Bundesbank and the (overwhelmingly ordoliberal and anti-Keynesian) economics profession were squarely against monetary union, afraid that it would jeopardize the German „stability culture“. Even Kohl would have preferred currency union to be preceded by political union. His European partners, however, wanted the common currency, not in order to give up their sovereignty, but to restore it. Seeing German unification at risk, Kohl agreed to monetary union first, in the hope for political union somehow to come about later as a „spill-over“. When powerful forces in his political camp hesitated to follow him, he overcame their resistance by insisting that the common European monetary regime be designed exactly on the German model, with the ECB as a giant replica of the Bundesbank.
The slogan with which the German government eventually sold the Euro to the German electorate became: „The Euro – as stable as the Mark“. Germany’s partners, eager to get something at all, in the end signed the treaty, presumably hoping to amend it later under the pressure of economic realities, if not on paper then in practice. It helped that the 1990s were a period when, issuing from the United States, fiscal consolidation was a common political objective for the countries of OECD capitalism, in the context of financialization and the transition to a neoliberal, non-Keynesian money regime. Committing to a ceiling on public debt of sixty percent of GDP, and to budget deficits never in excess of three percent, was in the spirit of the era, and financial markets would have looked with suspicion at any country refusing to fall in line.
Today it is Germany, together with countries like the Netherlands, Austria or Finland, that is reaping the benefits of EMU. But it is important not to forget that this has been so only since the financial collapse of 2008. During the first years of EMU, Germany was „the sick man of Europe“, and monetary union had a lot to do with it (Scharpf 2011). The common interest rate set by the European Central Bank, which had to take into account the economies of all member countries, was too high for a low-inflation political economy like Germany. A possible solution might have been wage increases forced by aggressive trade unions. In a heavily industrialized, export-dependent country like Germany, however, this would have meant not just fewer exports but also, in a time of increasing capital mobility, a drain of jobs to foreign countries. This explains the, to many outside observers, mysterious wage moderation of German unions since the early 2000s. By comparison, the more inflationary economies of the Mediterranean enjoyed negative real interest rates, coupled with a dramatic fall in the cost of public borrowing – the latter on the assumption by capital markets, encouraged by the European Commission, that with a common currency there would also be some sort of common responsibility for the solvency of member states. The result was a boom in the South and stagnation, at high unemployment and growing public debt, in Germany.
That situation was reversed in 2008, and contrary to popular neoliberal mythology this had little to do with the “Hartz reforms“. If at all, they made a dent in public spending, especially on unemployment insurance, and opened the door to an expansion of low-wage employment, outside of the core sectors of German economic strength. What really mattered was that the German economy, traditionally driven by foreign demand and due to its perennial „over-industrialization“, was in a position after 2008 to serve global markets for high-quality manufactures. As a result it suffered much less from the fiscal crisis and the breakdown of credit than more domestic demand-led EMU countries. Moreover, when it became clear that there would be no mutualization of the public debt of Southern member states – which of course was exactly in line with the treaties although it had been conveniently forgotten – countries with high debt had to pay much higher interest, raising the possibility of default of several EMU member states. This was the moment when Germany, unwillingly and unintendedly, became the new European hegemon.
Postwar Germany never had a desire to run Europe. German political leaders, regardless of party, agreed that as a European power Germany had a fundamental problem that required extremely delicate handling: it was too big to be loved and too small to be feared. The German national interest, therefore, had to be in becoming part of a larger European entity, one led not by Germany alone but in cooperation with others, in particular France. As long as Germany had secure access to foreign markets, for both the procurement of raw materials and the export of manufactured goods, it had no interest in international status. Under Kohl in particular, the integrity of the European cocoon in which Germany hoped to find a comfortable home became so important that Kohl, when there were frictions among his European partners, was always more than willing to provide the material means – i.e., pay the bill – for a compromise that left European unity, or its appearance, intact.
But that is no longer possible, and it is this condition that the Merkel government must come to terms with. Since the crisis began, and almost seven years later there is no end in sight, everybody in Europe and beyond looks to Germany for a solution, and often for one on the Kohl model. Now, however, the problems have become too big, certainly for Germany to settle them out of its pocket. What may be new about Merkel, as compared to Kohl, is not that she was eager to become the Führer of Europe. But the times are such that the German head of government, whether she likes it or not, has to step out of the shadows of the European backstage, if only because otherwise the front stage would remain empty. There the problems she faces are gigantic, both in Europe where integration has become a political and economic disaster, with Germany now appearing big enough to be blamed for whatever goes wrong but still being too small to make it right, and at home where the centrist consensus of German politics is about to collapse.
Concerning Germany in Europe, a few years of post-crisis monetary union have wiped out most if not all of the sympathies German postwar governments have worked so hard to earn among their neighbors. In the countries of the Mediterranean, in part also in France, Germany is now more hated than ever since the end of the war. Pictures of German leaders dressed in Wehrmacht uniforms and adorned with swastikas have become commonplace. The safest way to win elections is by styling them as campaigns against Germany and its Chancellor, on the Right as well as on the Left. Whatever else the adoption by the European Central Bank of “quantitative easing” may or may not cause, it has produced a sense of triumph in Southern Europe about Germany being defeated on the Board of the ECB. The hero of Italy is Mario Draghi, his firm neoliberal creed and his Goldman Sachs past notwithstanding, due to his having repeatedly outfoxed and humiliated „the Germans“. Nationalism is rampant in Europe now, and it is beginning to build even in what has long been the least nationalist European country, Germany. Foreign policy in Southern Europe is increasingly about how to extract concessions from Germany – about how to rein in Germany in the interest of one’s own country, of „European solidarity“, and of humankind in general. Nobody can even guess how much time it will take, if at all, to heal the emotional devastation the Euro has caused in the relationship between Germany and countries like Italy or Greece.
It is an irony of history, and one that cannot have escaped the Chancellor’s attention, that EMU, which was supposed to cement European unity forever, is now about to drive Europe apart. German policy is slowly beginning to realize that the conflict inside and over EMU is not just about a one-time „rescue“ of the Greek state or the French (and German) banks. Rather than disappearing after some kind of skillful heroic surgery, to give way to renewed unity, it is inherent in the very structure of EMU. EMU unites very different national societies with highly divergent economic institutions, practices and cultures reflected in different social contracts regulating the intersection between modern capitalism and social life. Important elements of these divergent political-economic orders are their respective monetary regimes. In a stylized account, the countries of the Mediterranean in particular have developed a kind of capitalism in which growth is primarily driven by domestic demand, if necessary stimulated by inflation propelled by public deficits and strong trade unions benefiting from high employment security, especially in a typically large public sector. Inflation, in turn, makes it easier for the state to borrow as it devalues the accumulated debt. Corresponding to this is a highly regulated, often public or semi-public national banking system. All these together make it possible to align more or less well the interests of workers and employers, in particular in domestically oriented small-firm industries. The price for social peace of this kind is declining international competitiveness, which must be compensated by occasional devaluations of the national currency, at the expense of foreign exporters. This, of course, requires monetary sovereignty.
The Northern European economies, above all Germany, work differently. They derive growth from successful competition in foreign markets, which makes them averse to inflation. This applies also to workers and trade unions, especially today as rising costs can easily cause outward migration of production. Being able to devalue the national currency is not important for an economy of this sort. While Mediterranean countries, including to an extent France, were best served in the past by a soft currency, countries like Germany have historically adjusted to a hard-currency monetary policy. This makes them averse, not just to inflation but to debt as well, even though the interest they typically have to pay is low (also because their accumulated debt is low). That they can do without an accommodating monetary policy furthermore allows them to live without the risk of bubbles blowing up in asset markets. It also benefits their savers, of which there are many.
A battle between two lines
A unified monetary regime for (North-European) save-and-invest economies on the one side and (South-European) borrow-and-spend economies on the other cannot serve both equally well. If one wants a common currency, one of the two political economies has to „reform“ its social system of production, and the social peace treaty founded on it, in the image of the other. Right now, the treaties place the onus on Mediterranean countries, obliging them to „change“ so that they become „competitive“, with Germany as their hard-currency task master. As it turns out, this is not what their governments can do, or can do on short notice, or want to do. The result is a battle of two lines inside EMU, one that is becoming nasty as it is not just about people’s material livelihood but also about their accustomed ways of life (as reflected in the negative clichés on both sides of the divide: the „lazy Greeks“ versus the „cold Germans“ who „live to work rather than work to live“ and, in defending both the treaties and their own capitalist settlement, appear as merciless disciplinarians of their European neighbors). Southern European attempts to have the Euro „softened“, so as to return through the backdoor to the rates of inflation, the public deficits and the currency devaluations they are used to, meet with the resistance of Northern European governments and voters who refuse to be turned into lenders of last resort for their Southern neighbors and pay for the money injections without which the latter’s political economy cannot prosper.
The domestic politics of EMU, then, is about alliances of member countries pulling the common monetary regime in different directions, towards either a Southern or a Northern version. While they cannot live with each other, neither do they want for the time being to live without each other: Northern European exporting countries cherish the fixed exchange rates whereas Southern countries want low interest rates, for which they accept debt ceilings and deficit limits, hoping for leniency in case of need as partner states are perhaps easier to placate than financial markets. Right now Germany and its allies have the upper hand. In the longer run, however, neither side can afford losing the battle as the loser will have fundamentally to rebuild the complex setting of interdependent institutions and understandings that is its political economy, with uncertain outcome and, even if all goes well, a long transition period replete with political uncertainties and economic disturbances. For example, whereas the Southern countries would have to accept a North-European labor market regime, the Germans would have to get out of their – in the eyes of their partners: destructive and egoistic – habit of saving.
As the debates on the future shape of the European monetary regime are taking place not just in technical but also in moral terms, it is important to note that none of the different ways of doing capitalism is necessarily morally superior to the others. The embedding of capitalism in society and the reconciliation of its logic with that of social life is always a messy affair, by nature improvised and compromised, and less than fully satisfactory from both perspectives. This does not prevent the partisans of each national model to consider the other models morally deficient while finding their own not just natural and rational but in correspondence with the highest social values. Thus when Germans urge the Greeks to „reform“ their political economy, and indeed themselves, so as to get rid of waste and corruption, they find the idea absurd that by demanding submission to the „laws of the market“ they are in effect demanding the replacement of old-fashioned, socially-embedded corruption with Goldman Sachs-type modern, financialized corruption as endemic in contemporary capitalism.
There is no reason to believe that the bitter ideological and economic conflicts that are today dividing Europe along national lines, fueling nationalist sentiments on all sides, will soon go away. Even if austerity will do what it is supposed to do and restore Southern European competitiveness under a hard currency, this will be at the cost of a decline of living standards in the debtor countries by an estimated twenty to thirty percent as compared to the situation before 2008. The reason why countries are urged to accept this is, of course, the market-liberal promise of a subsequent catching-up, on a then supposedly solid economic basis. But a narrowing of income differentials by convergence in and through free markets, given the numerous forces of cumulative advantage operating in the latter, is a chimera. Regional disparities, exacerbated by austerity, will ask for political address within EMU, on the model of nation-states like Italy and Germany. There the Mezzogiorno and the Neue Länder, respectively, benefit from and depend on continuous support from national governments to help them cope with the gap in regional living standards. In fact both Italy and Germany are transferring roughly four percent of their domestic product every year to their backward regions, which however is barely enough to prevent inter-regional income gaps from further increasing (Streeck and Elsässer 2014).
Economic disparities among EMU member states will give rise to grinding conflicts both between and within them. Southern countries will demand „growth programs“, a European „Marshall Plan“, regional policy support to help them build up a competitive infrastructure, and material “solidarity” in return for their adherence to the “single market” and European unity in general. Northern countries will be unable, for economic as well as political reasons, to provide more than only a small share of what will be required, not to mention asked for.  Still, in return they will demand control over how their money will be spent, if only to avoid being blamed by their domestic opposition for local waste, clientelism and corruption. Southern countries, for their part, will resist Northern intrusions on their sovereignty while complaining about Northern stinginess, whereas Northern countries will find what they have to pay too much and what they get back in control too little. Germany in particular, as the largest and, presumably, richest member country, will be perceived as politically imperialistic and economically egoistic, without being able to do much about it: its voters will not allow its government to support Southern countries unconditionally while refusing to pay more than token money for a European regional policy in addition to what they are already paying for Eastern Germany.
How long Merkel and her Grand Coalition, squeezed between their European partners and their German voters, will be able to assuage both is an open question. In fact they may soon be at the end of their wisdom. The German export industries and their trade unions have made the continuation of EMU their uppermost priority, and with the help of the Euro-idealistic Left have sacralized the Euro in a quite extraordinary way, considering that it is no more than a currency. Merkel, always attentive to her domestic power base, followed suit with her famous dictum, „If the Euro fails, Europe fails“. Having committed itself to the Euro in the name of high moral objectives, her government must now suffer painful and humiliating explorations of its concession space in the hard international bargaining that has become everyday European life under EMU. Recently the new Greek government, much more expert in game theory than its submissive predecessors, having signed a “reform” agreement in exchange for a promise of fresh money, looked on as the German finance minister, Schäuble, was pressuring his parliamentary party into ratification. One day before the vote his Greek colleague publicly declared the agreement devoid of substance, adding that ultimately there would have to be the very cancellation of Greek public debt Schäuble had just told the Bundestag was out of the question. It will have been noted with interest by the Greek minister that his German colleague still spent significant political capital on getting the agreement approved.
Not that the German government – acting as the executive committee of the German export industries, employers and workers united – was not willing to sacrifice for the Euro’s survival. The problem is that what used to be the „permissive consensus“ among Germans in favor of European integration has faded away as integration has penetrated more deeply into the national political-economic fabric. Suddenly there is „euroscepticism“ in Germany, the hitherto most unlikely site for it. A new party, the AfD, is threatening to eat away at the right end of the CDU political spectrum. If it is to be contained, the parties of the center, including the SPD, must beware of whatever European concessions other countries may in future demand from them. Up to now, transfer payments inside EU and EMU were often hidden in European regional or social funds. But the sums that EMU will require, nota bene not just for but also and in particular on a current basis after a Greek “rescue”, are too enormous to be concealed like that. Several lawsuits before the Constitutional Court have done their share to politicize „Europe“ and alarm the German public. For a while the Merkel government seemed to look with secret approval at the European Central Bank circumventing in a variety of imaginative ways the prohibition under the treaties on directly providing credit to member states. While the Bundesbank complained, the government kept remarkably silent. But as distributional conflict among EMU member states will become chronic, the costs of monetary union for Germany, politically and economically, may soar to a point where they can neither be hidden nor defended before a public that is itself increasingly suffering from fiscal consolidation.
The sacralization of the Euro notwithstanding, the German economy could in principle adjust to a life without it. Restoring some sort of monetary sovereignty to the countries of Europe, allowing the South (and the South-East waiting for entry) more breathing space, may be better suited to balancing economic performance than the single currency. Doubts about the sustainability of a one-size-fits-all monetary regime in Europe are beginning to grow, even in Germany. After all, if the German conviction is valid that under certain circumstances, a country’s economic health is best improved by austerity, it matters that in practice austerity has worked its wonders only if accompanied by a devaluation of the national currency (Blyth 2013). Today EMU is kept together almost entirely by fear and uncertainty over what would happen if it broke apart. Very soon this may no longer suffice to justify to German voters the contributions required of them to keep EMU alive. Facing a surge of popular nationalism, German political elites may find it advisable to abandon their ideological identification of the Euro with „Europe“ and listen to the growing number of economists even in Germany who are beginning to think about an alternative, more flexible, less unitary European monetary regime. While this may not be an ideal solution either, one needs to remember that ideal solutions are not normally available in a capitalist economy with its manifold internal contradictions. German exports may suffer for a while, but German taxpayers may benefit, together with German reputation among its neighbors. Remembering Angela Merkel’s rapid turn-around on nuclear energy, one should not forever rule out that she might at some point want to go down in history as the person who liberated Europe from a common currency turned into a common nightmare.
 On the following see, for example, Armingeon and Baccaro (2012), Blankart (2013 ), Hall (2012 ), Hancké (2013) and Höpner and Schäfer (2010).
 Erst sparen, dann kaufen – save first, buy later – is a fitting if slightly exaggerated summary of traditional German economic attitudes as encouraged by German political-economic institutions (Mertens 2014).
 The ECB’s current program of quantitative easing, officially aimed at raising the rate of inflation to two percent, may be seen as part of a strategy to soften the Euro, in the interest of Mediterranean member states. Indeed its first effect is a rapid decline in the Euro’s external value. One is reminded of the short-time Italian Prime Minister, Letta, who was in an unguarded moment overheard speaking of the “damned Euro” being too high for the Italian economy to recover. The problem is that a devaluation of the Euro benefits most of all an export-oriented country like Germany and fails to improve the position of weaker in relation to stronger EMU members. Moreover, in the longer term it may set off a competitive devaluation battle at the global level. And while German exporters will not complain about a further improvement of their competitiveness, German savers will for a long time have to live with negative interest rates.
 As impressively exposed by Piketty (2014).
 Rough estimates, based on the national experience of Italy and Germany, indicate that the transfers needed within EMU only to prevent income gaps from widening vastly exceed the ability to pay even of Germany, France and the Netherlands combined. See Streeck and Elsässer (2014), available at http://www.mpifg.de/pu/mpifg_dp/dp14-17.pdf.
 Perhaps this is a continuation of a habit developed by postwar Germans to confuse their collective identity with their money – something that Jürgen Habermas once ironically referred to as D-Mark-Patriotismus.
 The erratic behavior of the Tsipras government may in fact be a well-calculated attempt to probe the depth of the German commitment to EMU. Within a few weeks, ministers connected debt relief with reparations for German war crimes, threatening to impound German real estate in Greece; publicly reminded Schäuble of his involvement in the CDU party finance scandal under Kohl, speaking of “corruption”; threatened to send refugees arriving in Greece to Germany, among them an unknown number of jihadists; and so on. This was accompanied by a public prediction of the Greek Finance Minister to the effect that “whatever the Germans say, in the end they will pay” (Interview with La Tribune, January 20, 2015). The result is that providing financial support to Greece has become enormously difficult politically for the Merkel government. It will be attentively observed not just in Greece how much domestic dissatisfaction Merkel will be prepared to incur for the Euro.
 Of particular interest is a recent book co-authored by Heiner Flassbeck, Secretary of State at the German Finance Ministry under Oskar Lafontaine, and Costas Lapavitsas, economist and a leading figure of the anti-Euro wing of Syriza. See Flassbeck and Lapavitsas (2015).
Armingeon, Klaus and Lucio Baccaro, 2012: Political Economy of the Sovereign Debt Crisis: The Limits of Internal Devaluation. Industrial Law Journal. Vol. 41, No. 3, 254-275.
Blankart, Charles B., 2013 Oil and Vinegar: A Positive Fiscal Theory of the Euro Crisis. Kyklos. Vol. 66, No. 3, 497-528.
Blyth, Mark, 2013: Austerity: The History of a Dangerous Idea. Oxford: Oxford University Press.
Flassbeck, Heiner and Costas Lapavitsas, 2015: Against the Troika. Crisis and Austerity in the Eurozone. London and Brooklyn, NY: Verso.
Hall, Peter, 2012: The Economics and Politics of the Euro Crisis. German Politics. Vol. 21, No. 4, 355-371.
Hancké, Bob, 2013: Unions, Central Banks, and EMU. Labor Market Institutions and Monetary Integration in Europe. Oxford: Oxford University Press.
Höpner, Martin and Armin Schäfer, 2010: A New Phase of European Integration: Organized Capitalism in Post-Ricardian Europe. West European Politics. Vol. 33, No. 344-368.
Mertens, Daniel, 2014: Privatverschuldung in Deutschland: Institutionalistische und vergleichende Perspektiven auf die Finanzialisierung privater Haushalte. Doctoral Dissertation. Köln: Max-Planck-Institut für Gesellschaftsforschung und Wirtschafts- und sozialwissenschaftliche Fakultät der Universität Köln.
Piketty, Thomas, 2014: Capital in the Twenty-First Century. Cambridge, Mass.: Harvard University Press.
Scharpf, Fritz W., 2011: Monetary Union, Fiscal Crisis and the Pre-Emption of Democracy. Zeitschrift für Staats- und Europawissenschaaften. Vol. 9 No. 2, 163-198.
Streeck, Wolfgang and Lea Elsässer, 2014: Monetary Disunion: The Domestic Politics of Euroland. MPIfG Discussion Paper 14-17. Max Planck Institute for the Study of Societies, Cologne.