The American Interest
Analysis by Walter Russell Mead & Staff
E. German Bailout: $2 Trillion. How Much for All Europe, Germans Ask

It is deja vu all over again in Germany; there is even a plague of rats in Hamelin, famous as the location of the original Pied Piper story. As Germans listen to the increasingly anxious cries from the rest of Europe for much more German money to be channeled in various ways into bailout funds, Germans are thinking back to 1989 and the fall of the Berlin Wall.

The election of François Hollande last month in France seemed to mark the beginning of a shift in Europe’s struggle against the Euro collapse. No more is Europe dominated by a “Merkozy” alliance pushing for austerity above all else—Hollande’s campaign was largely predicated on an opposition to Germany’s handling of the crisis, and the French president has now emerged as the leader of a coalition supporting “growth” polices in Europe. France may still be the junior partner in the Franco-German axis, but Hollande has the wind at his back, as a growing number of leaders across Europe support him on growth vs. austerity. Merkel and the Germans are now looking increasingly isolated in their insistence on austerity and their reluctance to endorse more bailouts and debt-sharing measures, particularly eurobonds.

Yet despite a few minor concessions to demands for growth-focused policies, the election of Hollande has not led to a the softening of attitudes in Germany some expected. Last week, Germany reiterated its opposition to eurobonds, and the spread of bank panic from Greece to Spain has not yet led to pledges to send many more German Euros down south.

With the crisis becoming more dire, many observers, in America as well as Europe, have been baffled by Germany’s continued refusal to budge in a crisis that threatens to collapse the European project that has been a cornerstone of German postwar history.

To those familiar with Germany, however, this attitude should not be surprising. On my recent visit to Germany I heard much to support the points made in a New York Times piece that helps explain, at least partially, the historical basis for German reluctance to embark on another round of Greek bailouts. It all goes back to the Fall of the Wall:

Most economists agree that Germany could do more to help revive growth throughout the euro zone, and there are reports that Chancellor Angela Merkel is preparing to propose a major European Union plan to accomplish that. But the German reluctance to underwrite the economies of Greece and other struggling countries is not just a matter of the parsimonious Germans hoarding their funds, as it is so often portrayed, but a sense that subsidies do not breed successful economies. [...]

While unemployment in the former West Germany is 6 percent, it remains stubbornly higher, at 11.2 percent, in the east. In 2010 gross domestic product per capita was more than $40,000 in the former West and just under $30,000 in the former East, compared with 1991 figures of $27,500 in the West and about $12,000 in the East. But much of the narrowing in the gaps between east and west, experts say, is attributed to the migration of job seekers westward as much as to any significant improvement in the east.

There have been success stories in the revival of cities like Dresden and Leipzig, and some regions, especially on the southern edge of the former East Germany, are doing better. But the eastern part of the country today is known for perfectly rebuilt town squares that sit empty for much of the day and new stretches of autobahn with few drivers on them.

“Germany made huge investments in infrastructure in East Germany,” said Klaus Adam, a professor of economics at the University of Mannheim. “The hope that the rest would follow has not been fulfilled. You need to get the productivity figures up.”

The parallels are not exact. East Germany was a country that had lived for nearly half a century under one of the most repressive communist regimes in the world, and the economy had been wrecked by years of communist economics; Greece, for all its faults, was a functional, if messy, market economy and democracy. The problems they face are not identical. Yet there are certainly many similarities, and Germans are beginning to get a feeling of deja vu from this whole affair.

Germans have paid something like $2 trillion to “fix” the East; many German taxpayers feel tapped out and defensive. They suspect that no matter how much they give Greece, and Portugal, and Spain, and Italy — they will continue to be attacked as ‘stingy’ and ‘selfish’ and much of the money will end up stolen or lost.

They are probably right about all this — and that makes it much, much harder for German politicians to tell voters that it’s time to dig deep and pay the piper one more time.

Published on May 28, 2012 9:04 am
  • http://wjmc.blogspot.com William J McKibbin

    Germans are asking a good question — what is Germany’s responsibility to bailout Greece (and then Spain, Portugal, and Italy)…?

  • http://Inthisdimension.com Alex Scipio

    Maybe, just maybe, ALL Europeans need to demand of their governments the self-representation their constitutions promise. If any of the euro nations had any guts – if any of their citizens really wanted to fix, rather than complain about, the problems created by the euro and their own governments, they’d DEMAND new elections ON THE EURO ITSELF. Not ONE country allowed to vote on it accepted it. Time to vote again, put in place governments that trust the governed who elected them in the first place, and do what the people want. The problem, of course, is that Europeans, coddled as children since 1945 – never defending themselves, retiring at ridiculously young ages to go okay, letting their parents & grandparents die in a mild heatwave rather than come home from the beach (expecting someone else – GOVERNMENT – to nanny them out of any inconvenience), etc. Europeans are 3-4 generations of children & it’s time to grow up. If their governments collapse from not enough revenue from no kids & early retirements – well, that’s what the kiddies demanded. They made their beds – time to go lie in them. Why the Germans should prop-up others’ economies is beyond me. Why the IMF (USA) should prop-up ANY of them is completely unknown. Chronologically Europeans are adults. Time for them to act like it & take responsibility.

  • Gene

    Who, exactly, are these “observers” who are baffled by Germany’s position? And what kind of fantasy planet do they live on?

  • Kenny

    The Germans “suspect that no matter how much they give Greece, and Portugal, and Spain, and Italy — they will continue to be attacked as ‘stingy’ and ‘selfish’ and much of the money will end up stolen or lost.”

    EXACTLY!

    What else is their left to say? One more thing, actually. It centers on one of the hidden reasons to keep the euro afloat.

    As Irwin Stelzer writes in ‘The Weekly Standard’ (May 28):

    “The end of the euro, of course, would mean an increase in joblessness — among the bureaucrats who by the thousands inhabit the best flats and restaurants of Brussels and earn salaries and benefits that are the envy of national politicians. The Eurocrats contend even now that they need and inflation-busting increase in their budget, financed if necessary by higher taxes on the residents of European Union ..”

    Now you know the full story behind the fight to save the Euro — naked self-interest by the over feed Eurocrats.

  • Jacksonian Libertarian

    Germany needs to withdraw from the Euro.

  • Corlyss

    Whatever the Germans are willing to pay for their hegemony, it won’t be enough without giving the ECB permission to print money and create inflation which terrifies Germans. And even then, it won’t be enough.

  • Jim.

    I am confused by your evocation of the “pay the piper” saying. With the Greeks doing the dancing and the French calling the tune, what proverbial obligation do the Germans have to “pay the piper”? This won’t even get rid of any rats; it will simply institutionalize them in place.

    Is there a third proverb or alternative story you refer to?

  • http://secondwindupholstery.com john hughes

    The E. Germans in effect lived under Socialism the entire time any of them could remember in 1989. lt apparently snuffed out the individual entreprenural spirit in them as the story seems to indicate. The better ones go west. History shows that spirit is not a given. The U. S. has been a thrust toward a new template in the world. We are now embarked on a govt. centric path exemplified by Julia. lf we continue we will go full circle and arrive back at the tyrranny that has always been representative of the east. The demographics of the U. S. are also changing. lf the country lives for an extended period of time under socialism there is nothing to suggest we will be any different than the E. Germans. The Shining City on the Hill may well flicker out and die. The American experiment a blip on the timeline of history. We cannot allow the tyrants that end.

  • Robert

    One big reason the old DDR Länder remain poor and underemployed is the mindset most of the population still lives with.

    If you grew up under communism, odds are good that you’re bent forever. In essence, if you reach the age of 15 or 20 (it’s not exact) while living in a communist system, you’ll never fully adapt to a free-market individual-based system.

    This means that time simply has to roll onward long enough for demography to replace the old Ossies.

  • Eurydice

    I thought Germany was united now. I can’t imagine that West Germany thought it was going to pour money into East Germany so it could stand alone as some kind of economic clone. As with any country, some regions do better than others and that’s the situation now with the eastern part of Germany. And sure, Germany spent a couple of trillion on infrastructure, but there were jobs associated with that spending – plus, they got 16 million new consumers who needed to buy everything from soup to nuts.

    Another cost of unification may have been Germany’s very entry into the EU. There was an article in Der Spiegel a couple of years ago that summarized the contents of some private documents – Mitterand’s condition for the approval of German unification was that Germany commit to European unity. This has been confirmed by many of those participating at the time. Without this impetus, Germany may not have joined the Euro, or maybe joined later, or maybe the Euro would have been constructed in a different way, or maybe the French wouldn’t have had such political sway – who knows? But political decisions cost money, even if the bill doesn’t come due for 20 years.

    I guess my point here is that everything’s connected and to try to isolate events from history and equate Germany’s motivations with East Germany to those with regard to Greece is really just a simplistic political narrative for current political consumption.

  • Kent

    Your claim that Greece is better disposed to rebound than east Germany was ignores three huge factors. First, much of east Germany’s slow rebound owes to the 1:1 currency replacement coupled with full extension of west German social benefits, which addicted a huge slice of older east Germans to western dole. Second, Greece has for generations been the most over-regulated, state-dominated economy in democratic Europe. Third, the demographics of Greece and east Germany are depressingly similar. For more color on Greece, may I recommend
    http://www.europeanfinancialreview.com/?p=5014

  • http://www.architectureandmorality.blogspot.com Corbusier

    Without a doubt, the conclusions about East Germany in Mead’s post are quite true. I spent year as an exchange student near Dresden in Saxony in 1993 and then returned there in 2009 and was amazed by the transformation. Everything was made new and looked great, but I noticed that every place felt a bit emptier than before, especially outside the major tourist draws of Leipzig and Dresden. Older housing was being carefully demolished, elementary schools in the villages were either shutting down or consolidating. The population seemed increasingly geriatric, as the youth seem to have migrated West. I write about my observations at length on my blog here:

    http://architectureandmorality.blogspot.com/2009/08/beyond-shell-impressions-of-post.html

  • thibaud

    If a Greek exit would be disastrous for Europe, and if continued Greek sovereignty and membership in the eurozone would squander trillions from Germany, then the only viable solution is the one that the American states opted for in 1787: greater integration, with a central bank that has real power and that can issue debt which the Germans and everyone else will honor.

    The only way out for Europe now is to become more unified, which means to give Germany and the ECB much more power than they have now.

    Time for the Germans to step up, and for the rest of the Europeans to bow to the obvious fact that Germany is the powerhouse of Europe and must be given corresponding political clout.

  • Eurydice

    @thibaud #13 – In a way, Germany’s clout helped cause this problem. It’s insistance on an economic environment that was appopropriate only to Germany encouraged the spending spree. And in the end, economic unity has reduced Germany’s clout, not increased it – because now Germany doesn’t have the option of saying no to anything. It’s like being the president of the shipping line on board a sinking cruise ship – he can give as many orders as he likes, but he’s still going down.

  • thibaud

    Eurydice – You’re assuming there will not be any changes to Europe’s structure or the ECB’s charter. I think the force of events will cause significant changes to occur on both counts. Europe will either be much more cohesive and integrated, or it will wither and decline.

    I know the europhobes here wish for the latter – which, ironically, would significantly harm the US – but it seems more and more likely that European elites will realize that a German-centered, tightly integrated European economy is best for everyone, in Europe as well as outside Europe.