A bargain, forged in the fires of 2012’s economic emergency, has defined the European Union for the past two years. It was an agreement made between two sides that can be defined in several terms — the center and the periphery, the north and the south, the producers and the consumers — but essentially one side, led by Germany, provided finance, while the other, fronted by Spain, Portugal, Ireland and Greece, promised change. In order to gauge this arrangement’s chances of ultimately succeeding, it is important to understand what Germany was hoping to achieve with its conditional financing. The answer to that question lies in Germany’s own history.Â
Last week, the Governing Council of the European Central Bank’s monthly meeting left financial markets feeling frustrated. Instead of announcing the beginning of a highly anticipated bond-buying program known as quantitative easing, the European Central Bank, or ECB, only slightly changed the vocabulary it used to describe its plans: “We expect” became “we intend.” Pulses did not race with excitement.
In fact, the most interesting news of the day was that seven of the 22 members of the council apparently voted against the change in vocabulary. Those opposed included four governors of national central banks and three of the EU executive board’s six members, who, in theory, are responsible for shaping ECB policy. This ongoing debate over finances is deeply important to Europe’s future because it touches on a key question at the heart of the European project: Is Germany willing to underwrite the whole venture? Germany gave a partial answer to this question in 2012 when it financed the EU rescues of several member states, but the conditions it attached have since created more problems.
The trouble began with 2008’s economic crash and peaked four years later with a sovereign bond crisis. Germany reacted by creating various mechanisms and funds to bail out stricken countries, including Outright Monetary Transactions to safeguard sovereign bond prices. In return, the bailed-out nations had to enact painful changes to increase their competitiveness — at a lifestyle cost to their citizens. The rest of the union had to commit to financial reform by signing the European Fiscal Compact. With these conditions, Berlin hoped to bring the rest of Europe through a process Germany had already undergone.
The Makings of an Economic Miracle
After the Second World War, Germany found itself occupied and split in two. It was positioned in the middle of a continent that feared it, and its economy had been wrecked by 30 years of war and turmoil. Militarism had failed repeatedly and spectacularly. Germany needed a new ethos, so it returned to its roots.
Before the German unification of 1871 set the new nation on a course to its own demise, the great behemoth known as the Holy Roman Empire had stretched across Central Europe for over a thousand years, from 800 to 1806. It was a patchwork of states varying in size. Some were ruled by princes while some were independent cities, but all owed ultimate allegiance to the Holy Roman Emperor, whose real power over his vassals was paltry in comparison to that of the French kings or Russian tsars at his flanks. The Holy Roman Empire was a network of Germanic peoples, where no unit was powerful enough to militarily dominate its neighbors or to truly unify the region into a single state. The result was a competitive market where each princedom, duchy and city’s survival was largely based on its own efficiency and resources, along with those of any peers with which alliances were formed. Local resources were leveraged, and skilled craftspeople trained through lengthy apprenticeships, forming guilds that created products recognized for their excellence across the Continent.
