Germany’s dangerous obsession

As Germany’s Christian Democratic Union (CDU) and its Bavarian sisterparty, the Christian Social Union (CSU), seek to form an unprecedented“Jamaica coalition” with the liberal Free Democrats (FDP) and theGreens, the rest of Europe anxiously awaits the government programmethat will result from their negotiations.The stakes are high for Europe, because these are not ordinary times.The rise of economic nationalism, growing security threats, and theongoing refugee crisis have made collective responses more necessary.China is becoming increasingly assertive, and US President DonaldTrump’s administration has made clear its disdain for the European Unionand its suspicions of Germany’s economic strength.At home, the EU’s rationale is being tested by Brexit, and by thedefiant governments of Poland and Hungary – two countries that, asConstanze Stelzenmüller of the Brookings Institution recently noted, areenjoying the benefits of EU membership and ignoring the correspondingobligations.In this context, Emmanuel Macron’s election to the French presidency inMay was a relief for Germany. Yet Macron has put Germany in theuncomfortable position of having to respond to his proposals forEU-level reforms. By calling for a common EU defence fund, taxharmonisation, and a joint eurozone budget, Macron is upending theEuropean status quo.The question now is whether Europe’s largest and most prosperous countrywill provide the leadership these trying times demand. Each party inthe coalition talks brings a very different perspective to the table. OnEuropean matters, Chancellor Angela Merkel’s CDU, which has been inpower for 12 consecutive years, will bring continuity. But the moreconservative CSU is being pulled to the right by competition from thepopulist Alternative für Deutschland (AfD).As for the other two parties, the FDP has adopted a tough line towardEurope. Its leaders have suggested that Greece should leave the euro,and that the EU mechanism for bailing out struggling countries should bedismantled. The Greens, on the other hand, are keen on deepeningEuropean integration; but that is not their first priority, and they arethe smallest party at the table.Ultimately, the new government’s programme will likely reflect thesuspicion that other EU member states want to solve their problems withGerman money rather than domestic reforms. German politicians andopinion makers assess virtually every proposal for EU-level reformthrough this distributional prism. Schemes that are not intended toresult in structural transfers are routinely dissected to confirm thatthey will not become cash dispensers for other EU members.For example, Germans regard a joint budget not as a way to financepublic goods such as research or infrastructure, but as a device tocompel Germany to cover other countries’ expenses. Similarly, commonunemployment insurance is regarded as a scheme to make Germans pay forunemployed Spanish or French workers. And a deposit-guarantee programmefor banks is seen as a way to force prudent German depositors to pay fornon-performing loans in Italy.To be sure, each of these concerns may be legitimate. All proposalscertainly should be scrutinised to ensure that they will not be abusedor introduce moral hazard. European solidarity is not a one-way street.But, at the same time, German leaders must recognise that theirexclusive focus on distributional effects is poisonous. They shouldrecall the moment, in 1979, when British Prime Minister MargaretThatcher marched into a European summit and said, “I want my moneyback.” The same logic was on display nearly 40 years later during theBrexit campaign, when “Leave” politicians falsely claimed thatwithdrawing from the EU would bring “money back” to the National HealthService.Why has Germany become obsessed with the fear of paying too much? The EUbudget contains much to criticise, but it hardly treats Germanyunfairly. Germany may be the largest net contributor, but that isbecause it has the largest economy. As a proportion of national income,countries like Belgium, France, and the Netherlands also contribute ameaningful share of their net income.German fears that the European Stability Mechanism serves as a channelfor hidden transfers are similarly unfounded. Yes, the ESM benefits fromlow borrowing costs, which are essentially passed on to borrowingcountries. If Greece cannot repay its debt, ESM shareholders will suffera loss; and that risk is not priced into the interest rate Greece pays.But, so far, the ESM has continuously posted profits, and any loss itdoes suffer will be spread among all shareholders – including, forexample, Italy. The ESM is a far cry from a subsidy machine financed bythe German taxpayer.Some in Germany also decry the so-called Target2 balances, which recordbilateral surpluses and deficits of national central banks vis-à-vis theEuropean Central Bank. The University of Munich’s Hans-Werner Sinn, forexample, argues that the Target system has become a conduit for hiddenoperations to benefit debtor countries in southern Europe. True, inSeptember, the Bundesbank had a net surplus of €878bn ($1.2tn) vis-à-visthe ECB, whereas Italy and Spain ran deficits of €432bn and €373bn,respectively. These positions reflect the degree to which official flowsare still substituting for private flows.But, again, this arrangement has not cost Germany a single euro. On thecontrary, the Target system is essentially a collective insurancescheme: if a national central bank were to default, the loss would beshared among all ECB shareholders. The system thus allows Germanexporters to continue to sell their products in southern Europe, becauseit guarantees that they will be paid. The claim that Germany loses fromthis is simply false.It will always be in a political party’s interest to respond to theelectorate’s fears. But politicians also have a duty to let voters knowwhen their fears are excessive or unfounded. Europe needs a Germany thatwill veto half-baked proposals. But it also needs a Germany that canovercome its narrow obsessions and provide leadership.With the current coalition talks, German leaders have an opportunity toassess new global developments that will have far-reaching implicationsfor Europe and Germany alike. They must decide whether it is riskier todo nothing, or to take the initiative. No one is expecting a completechange. But one hopes for a government that will be more forthcoming inoffering solutions. – Project Syndicate * Jean Pisani-Ferry is a professor at the Hertie School of Governance inBerlin and Sciences Po in Paris. He currently holds the Tommaso PadoaSchioppa chair at the European University Institute.