German elites view southern Europeans as inferior

As long as Germans view the current crisis as a “southern” problem, recovery can't happen

Topics: AlterNet, Europe, European Financial Crisis, Cognitive Bias, Germany,

This article originally appeared on AlterNet.

Now that Greek elections are over, many are looking to Germany for a solution to the Euro’s woes. Unfortunately, the chances that Greece’s northern neighbor will assume responsibility for the financial messes of its southern partners are slim. The reason Germany continues to tout austerity rather than growth to save the Euro lies largely in Germany’s skewed view of history and of itself, which is based on two false assumptions.AlterNet

First, most Germans view southern Europeans as “different” from themselves. They assume that Germany enjoys great economic power primarily because its citizens have saved and been industrious, in contrast to, say, the Greeks, Spanish, or Italians. Bailing out Greece, according to this view, would encourage it and other countries like it to continue their lazy and licentious ways. Second, Germans (and many others) view Europe’s predicament as a currency or debt crisis rather than what it truly is: a current-account and balance-of-trade problem. Germans export more to their European partners than they consume, benefiting from this asymmetrical situation even as they expect everyone else to be exporters and savers like them.

While much reporting and commentary has focused on Germany’s moral disdain for its flailing E.U. partners, most German leaders view the Greek case differently. They rightly point out that key institutions of democracy and civil society are not sufficiently embedded in Greece, making it difficult to collect taxes and resolve distribution conflicts.

But Germany and Greece have had very different experiences in making their institutions work. In the post-World War II era, Germany was initially an occupied nation, whereas Greece had to contend with a communist threat and successive rightwing military dictatorships. The “embeddedness” of German institutions derives from the West’s imposition of democracy and the lack of viable alternatives to it. The same cannot be said for Greece.

Furthermore, Germany occupied and plundered countries like Greece before 1945, stealing and destroying both public and private wealth. Yet it was not asked to pay reparations. The Allies even forgave Germany’s World War I reparations. So Germany’s insistence that Greece pay all of its debts is not just hypocritical, it’s a complete misunderstanding of one of the key sources of post-1945 German economic success: massive debt forgiveness and free money—the exact opposite of austerity.

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Although most Germans find it difficult to remember, the Euro has benefited them greatly. The European currency has not only reduced Germany’s transaction costs with its biggest trading partners, but also made its exports more competitive because they are priced in a currency that is less valuable than the Deutsche Mark was. Thanks to the euro zone’s inclusion of countries (such as Greece) where wages and prices are much lower than in Germany, German exports are sold relatively cheaply. The so-called sovereign-debt crisis, therefore, is really a question of trade and capital-payment asymmetries for which the Germans bear some responsibility, since they built an export-driven economy. Germany’s surpluses are the flip side of Greece’s deficits.

But if German policymakers persist in demanding austerity, the crisis will finally hit Germans in their pocketbooks. Refusing to extend to Greece the debt relief that Germany once enjoyed only increases the probability that Greece will be forced to abandon the Euro, and the shock waves extending from a Greek exit would hit German capital markets hard. So far the crisis has affected only the stock market, which most German private investors avoid, viewing it (with good reason) as a speculators’ market. But once it hits bonds and other forms of commercial paper, which are broadly held by individual investors, Germans will start to realize that fiscal austerity is not equivalent to growing one’s way out of a downturn.

It might also remind Germans that the structural reforms they undertook during the 1990s to regain their competitive edge on world markets were implemented during a period of economic growth. In contrast, they are asking their southern neighbors to make much more painful cuts during a severe global downturn. That is a recipe for further contraction not just in Greece, but Germany as well. After all, once its European trading partners fall into a deeper recession, Germany won’t be able to rely on exports to sustain economic growth and Germans will have less money to be austere about.

While commentators are hailing the Greek elections as a first step forward, the results of that vote have done nothing to change the forces that brought about this European crisis. Greek voters expressed a desire to retain the Euro, but the country’s basic problem – how to build responsible fiscal institutions while undermining its ability to pay for them – remains as intractable as ever.

Meanwhile, the problem has spread to Spain, Portugal, and Italy because investors fear that the same contradictory mix of budget-cutting and institution-building threatens their solvency. This “contagion” has raised the cost of reform for these countries, further imperiling the European project. Worse, the German emphasis on austerity has reordered the single European capital market along national lines, as the exporting north is rewarded for the surpluses it refuses to redistribute to help the south. Precisely because there is no redistribution mechanism to help bail out the south– something that German policymakers vehemently oppose — the emergence of large interest rate differentials among national bond markets seriously endangers the Euro’s integrity.

As long as Germans view the current crisis as a “southern” problem rather than a shared European one – as a one-sided coin – and persist in the belief that pursuing austerity and reform during an economic slowdown is the answer to the problem, Germans will continue to look for solutions in all the wrong places.

Jonathan Zatlin is Associate Professor of History at Boston University.

Louis A. Ferleger is a Professor of History and Director of the Graduate Program at Boston University.

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