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Scapegoating Germany is easy but wrong

Report of April 15, 2013

EU governments need to convince their citizens that reforms are necessary, says Marcel Fratzscher in: Financial Times (10th of April 2013)

The most terrifying words in the English language, according to Ronald Reagan, are: “I’m from the government and I’m here to help.” Today, for some Europeans, they are: “I’m from the EU and I’m here to bail you out.”

Germany and the single currency have been made scapegoats for the problems of member states and for Europe’s inability to overcome the continent’s financial and economic crises. Berlin is accused of lacking solidarity, imposing contractionary policies and gaining competitiveness at others’ expense. The euro is blamed for depriving countries of their own central banks’ ability to act as lender of last resort and provide unlimited liquidity to the government and banks; and for depriving national policy makers of scope to devalue, thereby trapping them in a vicious spiral.

Germany is flabbergasted at being made the scapegoat. It sees itself as a victim, not a perpetrator. It has contributed substantial funds and assumed a great deal of risk for the five bailouts to date. And it has sacrificed much in the past decade to generate employment at home, with real wages barely higher today than in 1999.

But the fact is that every country in crisis needs a scapegoat. It is hard to accept that the fruits of decades of hard work can vanish in a few years. For Europe today, painful domestic reforms can be accomplished only with a high degree of national solidarity, and it is tempting to rally against a common nemesis to achieve such solidarity.

The history of financial crises is a good guide to how scapegoating works. Take the International Monetary Fund. Although some of its prescriptions during the 1997-98 Asian crisis were misguided, governments succeeded in implementing essential reforms – many of which domestic opposition had thwarted for years – by rallying national solidarity against the fund. The cost is that the IMF’s standing on the continent is permanently damaged, as shown by the unwillingness of Asian governments to accept its help during the global crisis of 2008-09.

This strategy has, to some extent, proved effective in Europe. Germany is the perfect scapegoat: it is the big European brother who is doing well, is often diplomatically clumsy and has a stained history that makes it tempting to revive old prejudices. There is another virtue: scapegoating has so far allowed moderate governments to keep political extremism largely at bay, a remarkable achievement given the deep social changes under way.

Yet scapegoating is dangerous. At stake for Europe is nothing less than the survival of the euro. The confrontations are causing deep rifts among both states and citizens. Surveys reveal a high degree of animosity between nations. Think of mocked-up photos showing German politicians in Nazi uniforms, or the misguided perception in Germany of citizens in crisis countries living on European welfare handouts.

The renationalisation of policy making – with politicians increasingly focused on domestic objectives – and the continued blaming of monetary union for national problems, in crisis and non-crisis countries alike, has eroded the credibility of European institutions and the euro. By making integration more difficult, if not politically impossible, this is starting to cause permanent damage. EU institutions may end up in the position of the IMF in Asia, with governments disengaging from Europe and turning inward.

What is the way forward? For one, Berlin must take more leadership in Europe. As irritating as it may be to be blamed for all Europe’s ills, Germany’s position of strength gives it a special responsibility. This means it should stop hindering financial and fiscal union, and start pursuing it more forcefully. To revive the European economy, it should also address its own domestic structural imbalances.

Second, EU countries must assume greater ownership of reforms. Rather than scapegoating, governments need to convince their citizens that the fundamental restructuring is necessary and will be fruitful. It is clear, not just in Cyprus and Italy but across the EU, that we have a long way to go to achieve this.

Third, selected decision-making processes in Europe must be removed from the national political sphere. The crisis has shown that, for many issues of eurozone governance, delegating decisions to intergovernmental political bodies does not work. We need to build institutions to fill this void. Creating a European finance minister, making institutions more immune to national interests and strengthening the European parliament are all urgent.

The renationalisation of policy making is splitting Europe and risks causing irreversible damage. The pursuit of these three measures is important if Europeans are to prove the Reaganite approach wrong and continue on the path of integration.

The writer is head of DIW Berlin, a research institute and think-tank.

Republishing with courtesy of Financial Times