The End of Germany's Sonderweg

Compromising on ESM, Merkel leads Germany down a more European path

08/10/2012 | by Andreas Rinke

Category: European Union, German Foreign Policy, Financial Crisis, Finance, Economy and Finance, Germany, Central Europe, Europe

For decades, Germany has been able to afford unique military and fiscal-political restraint. But all that is changing: first, Germany started participating in international military missions, and now with the European Stability Mechanism and the ECB’s growing political role, the swan song is being sung for the old Bundesbank philosophy. Of all possible times, Berlin has chosen this moment of peak economic strength to abdicate its decades-long special position.

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One week in September was enough to change Germany's politics for the foreseeable future. First, the President of the European Central Bank, Mario Draghi, announced the bank would be buying up limitless sums of state debt from struggling euro countries. Three days later, Chancellor Angela Merkel approved the plan. Six days later, Germany's Constitutional Court verified the legality of the permanent euro bailout fund (officially the European Stability Mechanism, or ESM).

Whether one welcomes these developments as a means of holding back the debt crisis or rejects their usefulness, they represent a break with the rest of Germany's post-war history. In the growing euphoria of the financial markets and the easing of worldwide governmental tensions, the fact that Germany has knocked down the second of its fundamental pillars of post-war identity has faded completely into the background.

The first such pillar, namely Germany's self-imposed limit of the use of its military forces singularly for national defense, was removed in 1991 after nearly two decades of slow, incremental expansion of participation in foreign interventions. This development began with missions in Cambodia and Somalia. The Federal Constitutional Court gave its final blessing for foreign military missions in its ruling on July 12, 1994, so long as the Bundestag has consented to the use of force.

The first combat mission followed in 1999 with Germany's participation in the Kosovo War, a conflict for which there was not even a UN mandate. Germany's soldiers were sent to Afghanistan in 2002, where little by little they moved from a purely defensive role to responsibility for the security of the northern part of the country, in the end assuming leadership for any hostilities outside the NATO zone. These developments marked the end of Germany's Sonderweg, literally special path, of demonstrated military restraint, which had appeared after 1945 as a reflex against the horrors of the Third Reich era.

The second pillar of Germany's Sonderweg was the maintenance of an orthodoxy of financial market policy which committed the state to a strict division between monetary policy and governmental funding. The backdrop for this division was above all Germany's historical experience with severe hyperinflation, which was also the reason for the 1948 creation of the Bundesbank, then known as the Bank of German States, as a politically independent protector of the stability of monetary value. This was intended to ease German inflationary fears. The decades-long pursuit of this goal made the Bundesbank a stand-out in the Western world. Renunciation of the deutschmark and introduction of the European Community currency, the euro, was only approved by the Germans, because the European Central Bank (ECB) as laid out in the Maastricht Treaty was sold to them as a giant copy of the Bundesbank, to be located in Frankfurt, prioritizing its mandate of limiting inflation.

New Role of the European Central Bank

Within three years, the debt crisis led to massive changes in the ECB’S role. It still maintains its independence. However, the necessity of stabilizing the eurozone by all possible means led to an intensive dialogue with policymakers, even in Berlin. The ECB is now officially tied to every major bailout activity in the eurozone. It is one leg of an international troika, along with the EU Commission and the International Monetary Fund (IMF), defining the reform requirements for states seeking bailout funds. Further, it is flanking the stabilization of these states within the eurozone. In this role, the ECB has bought up more than 200 billion euros of state loans from battered euro countries in the past few months.

The announcement of a new program has paved the way for the unlimited assumption of these debts by the ECB—so long as the euro countries slip under the euro-rescue schemes, accepting and following the reform requirements of their partner countries. The ECB and both the German ruling coalition and the opposition parties have repeatedly stressed that this is by no means an assumption of direct state financing by the ECB, because the bank is buying the debts on the secondary market rather than purchasing them directly from the states in question. This is nevertheless an entirely new dimension: SPD party leader Frank-Walter Steinmeier calls it a "revolution," CDU/CSU party leader Volker Kauder complains that the ECB is running the risk of losing its independence when it ties its bailout decisions to the political decisionmaking process surrounding the dispensation of ESM funds.

Further, the ECB has also been granted, through its buyouts, the option to refinance the euro countries at lower rates in the long run. This is because the calculation of risk premiums for initial public offerings is strongly influenced by the interest rates of existing government bonds. The bond buyouts of the last few months have de facto already made it possible for countries such as Spain or Italy to decrease their refinancing costs, even though at a very high level. In any case, the euro states assume the risk of these buyouts, proportional to their capital investment in the ECB, in the case of default or drastic loss of value.

This raises the question of whether or not this is the proper cure for such an exceptional case as the debt crisis. In any case, the fact that Bundesbank President Jens Weidmann’s position against the bonds-buying program was overruled by the other members of the ECB Governing Council illustrates that the ECB is no copy of the Bundesbank. The currency used by Germany and its closest partners—the euro—is being defended by a bank that behaves more and more like the other central banks of the Western world. At the end of last year, the ECB provided European banks with a new credit line of one trillion euros. Even the ECB, when faced with a crisis started by cheap money, will fight it with more cheap money, at least temporarily—which has led repeatedly to sharp criticism of competitive distortion from Brazilian President Dilma Rousseff.

Strengths as Weaknesses

At first sight, it appears paradoxical that Germany abandons its unique policies or Sonderwege at the height of its strength. The debate over the expansion of military missions and an increased responsibility to allied forces began immediately following German reunification. The swan song of fiscal policy orthodoxy was sung at the moment when Germany was recognized worldwide as the economic and political leader of the EU—a strength which even France, the EU's second-largest economy, is no longer able to counter.

There are two reasons for this seeming paradox. The first is that Germany's strengths are distorted and overestimated by the media. The so-called German leadership during the debt crisis, based upon Germany's contribution of just over 20 percent of the EU's 2011 gross domestic product, was above all a myth popularized in other countries. This myth was then wielded as a weapon against Berlin by policymakers. Despite this, a country such as Malta's vote is equal to Germany's on the ECB Governing Council. In the Council of the EU, a country such as Great Britain can, using its right of veto, prevent necessary or desirable changes to the European treaties. And even in the European Parliament, Germany's population is not proportionally represented. Nevertheless, public discussion is led, whether consciously or unconsciously, as if Germany could lead its partners through the European arena by their noses. In truth, Merkel's government is constantly forced to compromise.

The second reason is that the explicit desire for stronger integration between 27 EU countries and 17 eurozone states requires a continual balancing act in which certain national particularities are attenuated.  Germany has relinquished other Sonderwege in the past, for example abandoning its university degree system (Diplom) for an European norm, in order to provide freedom of movement for European students as well as ease the recognition of educational credentials. Even weapons export regulations have been brought into line with those of France or Great Britain, in recognition of the increasing importance of multinational structures within the European defense contracting industry.

The debt crisis especially has raised pressure within the eurozone to increase uniformity across the currency area. The euro countries have become measurably more "German" in the past three years, because new agreements were repeatedly formed which forced the economies to reform, monitor, control, and sanction their activities, with an eye toward improved competitiveness and solid budgetary management. But in return, Germany has become more "European." Chancellor Merkel reached agreement with her partners only through difficult compromises: step by step, she was forced to back away from earlier German policies.  First, a temporary bailout plan (EFSF) was accepted, then replaced by a more permanent one (ESM). The plans to purchase state debts on the primary and secondary markets, once vehemently opposed, were then accepted. At the June summit in Brussels, Germany sanctioned the plans for new, stricter bank controls in the eurozone along with the formerly frowned-upon option for direct recapitalization of the banks through ESM. And as previously mentioned, the German government was forced to accept that the ECB was changing into the "big bazooka" to shore up stability of the eurozone that the Americans and others had clamored for since the outset of the crisis.

From Observer to Participant

A decisive moment for the change in German political behavior was 1990, after which Germany transitioned from an observer in world politics into the position, once again, of a participant.  Over decades, it had been possible for West Germany to afford its military and financial-political abstention, because leading Western allies granted special treatment to the frontline of the East-West conflict. But since reunification, the end of the East-West conflict, and the advancement of EU integration, these roles have changed. No one made this point so clearly as Poland's Foreign Minister Radoslaw Sikorski, who was quoted in November 2011 as saying, "Today I fear less German power than German inaction."

In other words, because Germany has moved from the edges of international politics into the center, its partners will no longer allow Berlin to maintain its former innocence.

It is also notable that the end of Germany's Sonderwege is not equivalent to the relinquishment of national traits. Germany's 2011 abstention in the UN Security Council on the question of intervention in Libya shows that, despite its participation in international missions, Germany still maintains certain reservations when it comes to the use of force. And future debates over the debt crisis will illustrate that Germany's role, despite its acceptance of an ECB "bazooka" and regardless of any changes that may occur in its government leadership, will less offer support for repeated transfer payments to southern countries than push strongly for improved competitiveness across all euro countries.

ANDREAS RINKE is the chief political correspondent for Reuters in Berlin.