Germany at the Gates?

Several years ago, a comical chain email emanating from Britain made the rounds, poking fun at how the English language would evolve if the Germans were to take over the world. Today, quite a few Europeans outside of Germany are contemplating a much more real specter of Germanic dominance.

Only a brief glance at the pathetic state of affairs across the European Union makes it patently obvious why Germany is asserting itself as the natural leader of the EU.

Among the seven largest economies in the eurozone, Germany stands out in terms of having the lowest core inflation and the slowest growth in unit labor costs.

Germany made a series of tough choices as it dug out of the 2008 recession. In particular, many ordinary Germans have endured either stagnant incomes or pay cuts, as unions and employers both agreed to concessions to keep the economy going. However, the net positive effect of this tough medicine is easily evident.

No wonder then, that Germany does not want to see its hard-earned euros squandered in less-than-serious attempts at reducing deficit spending in Italy and other deeply indebted European countries. From Germany’s perspective, Europe’s recovery has to be done the German way.

There is a lot to argue in favor of the rest of Europe adopting the rigor and discipline that Germany has demonstrated over the past decade.

If the “Battle of Europe” were to be decided by technocrats and economists — such as “Super Mario” Monti in Italy and Lucas Papademos in Greece — there would likely be little pushback against copying Berlin’s recipe for a successful recovery.

But while a new wave of professors and technocrats are running cabinets these days, the political decisions about Europe’s future are made in the chambers of parliaments and at the polls. The German way of fiscal management is much less popular with legislators worrying about their reelection.

Germany needs to continue to tread carefully in how it asserts its leadership ambitions. May 8, 1945, may be a couple of generations past, but the memory of World War II remains vivid in the minds of those who fought against the Wehrmacht and fascism.

A British member of the European Parliament made this point when he asked why Europe was looking on as Germany readied itself to take the reins, seeing as how the main idea of creating the European Union 50 years ago was to contain Germany’s zest for power and control.

The Germans are right in asking that the rest of the eurozone, as well as all members of the European Union, be required to demonstrate true signs of responsible fiscal behavior. Sound fiscal policy, elimination of deficits and reduction of sovereign debt are the indispensable foundation of a lasting European recovery.

There can’t be any doubt about Europe’s commitment to embarking on a journey over the next couple of decades that moves the union closer to fiscal soundness, one step at a time, year after year, without setbacks caused by handing out unfunded favors at the polls.

Germany knows that a solution has to be found that allows Europe to pull through together. In this vein, it is highly encouraging to see that Nicolas Sarkozy and Angela Merkel are now talking to each other behind closed doors rather than about each other in the media. The two leading powers in the eurozone clearly understand what’s at stake. They seem to have found a way to leverage the gravity of the situation in a way that unites rather than divides them.

There seems to be a growing consensus among the eurozone’s finance ministries that the common currency can only be saved if there is a higher degree of integration in fiscal matters that, possibly, includes a centralized treasury.

Markets have already started looking at European sovereign risk through an integrationist lens. Political leaders would be well-advised to do the same.

The European confidence crisis is also, and perhaps even more so, an opportunity for the European Union to reinvent itself. The 27 EU members are all in this together, whether they like it or not.

The current crisis can become the spark that ignites a movement to transition the European Union from its current status into a true United States of Europe based on a federalist model, where increased centralization of fiscal, foreign and defense policy is balanced with increased regional autonomy at the state level.

The re-negotiation of the EU treaty that is currently being discussed can become the critical first step towards a full “USE,” provided European leaders seize the opportunity.

Some apparatchiks in Brussels may soon mourn the loss of control over the curvature of bananas and cucumbers sold in the EU. The famous “Bananenverordnung” (EU 2257/94), as well as the “Gurkenverordnung” (EU 1677/88) have become shorthand for how ridiculously Brussels works.

One would think that, considering the magnitude of the EU’s current issues, European leaders should find a way to focus the administration in Brussels on the bigger picture.

The creation of a “USE” may be the best shot at recalibrating Brussels, rebuilding Europe’s relevance in the world and embedding German virtues in a stronger Europe.