Germany’s approach to the euro crisis stems from deeply entrenched neoclassical economic views. The fundamentals of these views will not change and must be taken into consideration when negotiating with Germany, for example by making the case for pan-European investment programs instead of outright atttacking austerity as a concept.

Contrary to popular belief, Germany’s reaction to the euro crisis — its strict focus on price stability and austerity — is not a result of historical experiences with hyperinflation, a selfish intent to maintain a surplus at the expense of others, or an intent to punish Southern European deadbeats.

Rather, the German approach stems from an entrenched belief in price stability coupled with budgetary discipline as the only road to prosperity. German economic orthodoxy holds that a European coordination of taxes, labor laws, retirement age, etc. is unnecessary. If everyone “does their homework” prosperity will naturally result. Hence the emphasis on fiscal discipline.

The European Council on Foreign Relations in a policy brief (PDF) recommends that member states accept these concepts when dealing with Germany. Instead of attacking austerity as such, they should demand pan-European investments, Europe level taxation and more time to implement austerity measures. The basic German position will remain the same regardless of government, even if a center-left coalition may be more open to eurobonds.

Analysis

Traditionally social democratic-dominated Europe is shifting toward a more liberal (in the European sense) path.

Any solution to the euro crisis is unthinkable without German support. The economic reality of tomorrow’s Europe will thus have a distinctly German flavor. The German penchant for a strict seperation of fiscal and monetary policy, coupled with debt brakes hardwired into national law, has an obvious right-wing/left-wing element to it, which could affect the trajectory of European societies for years to come.

The dominance over the past fifty years of Europe’s Social Democratic parties is arguably waning. This can be seen in both the acceptance of Germany’s economic concepts and in the fact that center-right governments now rule in most European capitals.

One variable in this scenario is, when the sense of urgency has passed, will the still strongly entrenched left wing continue its acquiescence of the German line?

A counter reaction to the current trend could be fueled from both the left and the right. For example, by right-wing nationalistic anti-German, pro-sovereignty sentiments and by left-wing sentiments of Germany (and the European Union by association) favoring big business.

Wikistrat Bottom Lines

Opportunities

• Long-term economic growth and an economically balanced Europe.

Risks

• Resentment of the European Union in general and of Germany in particular could mount and cause social unrest.
• The Southern European economies could stagnate.
• The eurozone could fragment between core and peripheral member states.

Dependencies

• This scenario hinges on the implementation of the German blueprint.

Graham O’Brien, Finn Maigaard and Miguel Nunes Silva contributed to this analysis.