German Chancellor Angela Merkel visits Canada this week as champion of an austerity policy stance that is failing Europe. Without a change in policy direction, a prolonged period of European economic stagnation is likely to continue. German-sponsored austerity policies shut the door to economic recovery in the Eurozone, but since they have the full support of her party as well as business figures and key opinion-makers, the Chancellor is unlikely to support a new approach.

The Chancellor is caught in the most restrictive of positions for a political leader. If she wanted to change direction, her supporters would become her opponents.

With Germany occupying the dominant leadership position within the European Union, European economic and political prospects depend on an enlightened Germany: Europe has a German problem. Given that public sector cuts and private sector stagnation have cross-border impacts throughout the European Union (EU), it becomes difficult for a single-member nation to succeed without action co-ordinated with others. Seemingly unable to recognize that for Germany or anyone else to export, other nations must import, the austerity-minded remain obstinate in their resolve that every nation must retrench. Europeans cannot say economy without mentioning crisis as well. Youth unemployment, the fragility of the banking sector, wage stagnation, consumer gloom, and slack private investment contribute to a sense of permanent recession. The well-known linkage between a sense of well-being and broad economic performance contributes to a dismal outlook for the EU member countries. This same linkage is at the origin of the German problem.

Following the defeat of Nazi Germany, and the revelation of the death camps, Germany suffered a national humiliation of catastrophic proportions. The post-war settlement left Germany divided in two. West Germany (officially the Federal Republic of Germany) was firmly on the American side in the Cold War. Rebuilding German national pride became tightly linked with promoting German economic success.

The German economic miracle, building an export-driven manufacturing powerhouse, leading to a return to prosperity, and the emergence of a strong currency, the vaunted Deutschmark, became the essence of a new German nationalism. With considerable collective effort, Germans regained a sense of esteem largely through identifying themselves with their economy, and the strength of their currency.

The Chancellor and her supporters feel confident they can draw upon popular support for a continuation of the policies that produced not just the post-war miracle, but also, at considerable costs, the reunification of Germany, after the 1991 fall of the Berlin Wall.

The German policy consensus has been called ordoliberalism. Ordoliberals believe in competitive markets and the price mechanism. But, suspicious of monopolies, they also favour a strong state to establish rules and regulate markets. Where the ordoliberal doctrine most seriously breaks down is when it is applied to banking and finance. Money and banking are subject to prudential, not competitive principles. Yet some 172 economists signed a public letter calling on Merkel to allow banks to go bankrupt rather than to contribute to the European Financial Stability mechanism. Not understanding that when bankruptcy strikes the financial sector, sound banks go down as well as weak banks, amounts to a major flaw in thinking.

Not only have the ordoliberals seriously misunderstood how the monetary economy works, they have neglected the German post-war experience. Rather than producing its own economic miracle, Germany had considerable outside assistance. After France, it was the second-largest recipient of massive American Marshall Plan aid (largely motivated by a crusade against communism) that proved an indispensable part of economic re-building.

Politically, post-war Germany sealed an important bilateral pact with France to remove economic motives for war by fostering economic co-operation. In 1957 the Treaty of Rome announced a six-country pact for European integration. In 1955 Germany had joined NATO, and moved in a de-militarized direction. NATO itself was famously described by its first Secretary-General Lord Ismay as an agreement to keep the Russians out, the Americans in, and the Germans down.

The German determination to maintain their own economic course, and impose austerity on others, means the political project of the EU is subordinated to German economic doctrine. This neglect of the political dimensions behind the Eurozone woes worries world-renowned German philosopher Juergen Habermas (and co-authors) who are calling for Germans to come forward with a new approach to European unity, that would allow for direct citizen engagement in European Union politics.

The dilemma facing Europeans today is who is going to explain that German national pride — a form of chauvinistic nationalism — must be replaced by a European civic pride — with all that entails for a re-configuration of economic policy? 

Duncan Cameron is the president of and writes a weekly column on politics and current affairs.

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