Commentary: How Germany's Fall from Grace Harms Europe

By John Rossant

The international scene is tense. An ambitious French leader, eager to build a united Europe as a counterweight to an overweening and too-powerful U.S., cuts a broad political and economic deal with his German counterpart. Yet most European nations--led by Britain--recoil from this vision. It would, they say, sink the Atlantic alliance on which the security of Europe has previously depended. The Franco-German challenge fails.

Sounds like today's headlines, right? A new Berlin-Paris entente is angering both the U.S. and other European states for its outright opposition to America's saber-rattling against Iraq. In fact, the diplomatic crisis described above occurred in 1963, when an imperious Charles de Gaulle tried to meld French political prestige with Germany's economic might to counterbalance U.S. power. Then, as now, other European states declined to sign up. Had Jacques Chirac and Gerhard Schröder bothered to do a little back-of-the-envelope calculations before they announced their grand plans for Europe in mid-January, they would have realized that many European states would resist them. And resist they have.

This, then, is the cost of Germany's fall from grace: a deeply split Europe, more paralyzed than ever about its continued economic and political integration--and facing a damaging confrontation with the U.S. The German defiance is raising eyebrows even in France. "Germany has neither economic power nor political vision anymore, so it's a waste of time [to make an alliance with it]," says Pierre Lellouche, a member of Chirac's center-right political party.

The damage, though, has been done. Europeans everywhere are starting to worry about other fallout from a dysfunctional Germany. It represents, after all, one-third of the euro zone's economic output. That's why its failings can blunt what little dynamism remains in the Old World. Germany may still be an export powerhouse: There are always customers around the world for its cars, machine tools, and chemicals. But its $10 billion-a-month trade surplus demonstrates just how weak demand is back home. Depressed, dismayed, and angry Germans simply aren't spending anymore--and aren't doing their bit to help out the rest of Europe. A Teutonic pall is spreading across the Continent.

The story might have had a happier ending. Imagine what today's Europe would look like if Schröder had continued on the path of reforms he started in 1999 when he slashed capital-gains taxes and started to whittle away at state subsidies. The mere fact that Germany at last seemed to be making dramatic changes proved a powerful spur to others: Schröder's actions were invoked by reformers in Paris' center-left government as an example of what could be done. If Schröder had continued on that bold path, it could have set off a virtuous circle of pro-growth policies in the core of Europe. But he did an about-face and pandered to unions and the pacifist left.

Instead of Germany telling Europe what to do, it's time for the opposite to happen. Europeans should tell Berlin that serious reform is absolutely essential: Europe's stability depends on it.

Consider the alternative. If the tensions between Europe's slow-growth German-dominated core and its more dynamic periphery increase, then the dire warnings of former Chairman of the Council of Economic Advisers Martin Feldstein will come true in spades. Writing long before the introduction of the euro, Feldstein worried about the consequences of a single currency in a multi-speed Europe. "Instead of increasing intra-European harmony and global peace," Feldstein wrote in the U.S. magazine Foreign Affairs, a single currency "would be more likely to lead to increased conflicts within Europe and between Europe and the U.S."

Feldstein couldn't have predicted the flap over Iraq. But it's easy to imagine that the split between Germany and much of Europe over foreign policy may lead to even sharper differences over the whole European experiment. Finland, Ireland, Spain, and other small countries are already alarmed at Germany's inability to curb its budget deficits.

Pressuring Germany to curb spending, boost growth, and act like a responsible leader would be the best way of honoring Germany's pact with the rest of Europe. After all, Germany's fateful decision to abandon the then-mighty German mark for the euro was meant to ensure "a European Germany rather than a German Europe," as former Chancellor Helmut Kohl ceaselessly reminded everybody. Kohl wanted to banish Europe's fears of German dominance. But contemplating Germany's weakness is just as scary.

Rossant covers European economic and security issues from Paris.

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