Is Germany trying to win World War III?

Germany lost World War 1 and World War II. Wags looking at the Eurozone crisis say Germany is now winning World War III, without any weapons, through sheer economic domination of Europe.

Hitler launched World War II demanding a little more lebensraum (living space) in Czechoslovakia and Poland. But Angela Merkel, it is said, has obtained lebensraum right across the Eurozone, from Greece to Portugal.

Germans are outraged by such witticisms. World Wars I and II were military adventures of the Kaiser and Hitler, seeking to reduce Germany’s neighbours to vassals. But ever since, Germany has been among the most pacific nations. Its economic dominance today stems entirely because from high productivity, hard work and prudence (manifested in high savings rates and balanced budgets). It’s ridiculous to call this World War III, say the Germans; it’s peaceful economic cooperation that has brought immense benefits to all Europe. This is surely true.

The problem, say the Germans, is that some lazy, spendthrift bums (collectively called the PIIGS – Portugal, Italy, Ireland, Greece, Spain) have run up huge unsustainable fiscal deficits and debts, and want to be rescued time and again by the prudent, productive northern Europeans (like Germans). Voters in northern Europe are now revolting against further rescues of the bums. Such rescues will be made only if the bums accept truly draconian conditions, shape up, and become more, shall we say, Germanic.

However, German attempts to paint this as a tale of the ant and the grasshopper are vastly overdone. First, during the recent great recession, Germany itself violated the 3% fiscal deficit limit of the Maastricht Treaty along with all others, and so cannot preach fiscal virginity. Second, Germans have been easily the largest beneficiaries of the huge prosperity created by the European Union, and seem oblivious to how much they will lose if the Eurozone collapses. Third, Germany is able to run large trade surpluses only because others run corresponding deficits.

In the Great Depression of the 1930s, all countries tried to become Germanic by cutting imports and promoting exports to generate surpluses. But since one country’s imports are another’s exports, when everybody tried to cut imports, this slashed everybody exports, deepening the Depression. The PIIGS certainly need to improve their productivity, savings and exports. But they find exports difficult not simply because they are lazy bums but because they are locked into a common currency, the euro. So, they cannot devalue to offset the fact that German productivity is rising faster than elsewhere.

The euro’s value pools the strengths and weaknesses of individual members. So, the euro is greatly undervalued for an economy as productive as Germany’s, and this artificially boosts German exports. But the euro is also greatly overvalued for the less productive economies of the PIIGS, and prevents them from exporting more. Seen in this light, the PIIGS are actually providing huge support for Germany’s exports at their own expense. Germany is less virtuous and the PIIGS less parasitic than the bare data suggest.

However, voters in Germany, Holland and Finland insist that southerners are lazy bums. For continued support to the PIIGS to prevent a Eurozone collapse, some Germans want to impose humiliating conditions that virtually convert Greece into a vassal state. Michael Fuchs, spokesman for Germany Christian Democratic Union, declared “The free lunch is over: no external controls, no money. I can’t look my constituents in the eye and say anything different.”

Some proposals for external controls include a special EU Commissioner to oversee the Greek economy, empowered to overrule the government on taxes and spending. Some want a rescue condition specifying that Greece must in future give first priority to paying foreign creditors, before providing anything for its own citizens.

This resembles the Treaty of Versailles, imposed on Germany after World War 1. The conditions of the Treaty were so humiliating and onerous that it ultimately sparked the rise of Hitler. Imposing a Versailles-2 on the PIIGS will lead to an angry break-up of the Eurozone.

Saner folk—including Angela Merkel- realize there are limits to the humiliations that can be imposed on the PIIGS. The fiscal discipline demanded of them has already plunged them into deep recession, with wage freezes and mass unemployment. To add insult to injury through political humiliation (like external control of Greece’s spending and taxation) will be a recipe for killing the Eurozone.

Some eminent economists will welcome this as good riddance. But most Northern Europeans voters want to have the euro and Eurozone. They just don’t want to pay the price required for its survival. Something will have to give.


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