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Germany’s Dangerous Obsession

The European Union's ability to respond to global and internal challenges will depend largely on the governing program that emerges from Germany's ongoing coalition talks. Will the next German government be willing to put fears of unfair EU redistribution to the side, or will it continue to allow those fears to dictate its every action?

PARIS – As Germany’s Christian Democratic Union (CDU) and its Bavarian sister party, the Christian Social Union (CSU), seek to form an unprecedented “Jamaica coalition” with the liberal Free Democrats (FDP) and the Greens, the rest of Europe anxiously awaits the government program that will result from their negotiations.

The stakes are high for Europe, because these are not ordinary times. The rise of economic nationalism, growing security threats, and the ongoing refugee crisis have made collective responses more necessary. China is becoming increasingly assertive, and US President Donald Trump’s administration has made clear its disdain for the European Union and its suspicions of Germany’s economic strength.

At home, the EU’s rationale is being tested by Brexit, and by the defiant governments of Poland and Hungary – two countries that, as Constanze Stelzenmüller of the Brookings Institution recently noted, are enjoying the benefits of EU membership and ignoring the corresponding obligations.

In this context, Emmanuel Macron’s election to the French presidency in May was a relief for Germany. Yet Macron has put Germany in the uncomfortable position of having to respond to his proposals for EU-level reforms. By calling for a common EU defense fund, tax harmonization, and a joint eurozone budget, Macron is upending the European status quo.

The question now is whether Europe’s largest and most prosperous country will provide the leadership these trying times demand. Each party in the coalition talks brings a very different perspective to the table. On European matters, Chancellor Angela Merkel’s CDU, which has been in power for 12 consecutive years, will bring continuity. But the more conservative CSU is being pulled to the right by competition from the populist Alternative für Deutschland (AfD).

As for the other two parties, the FDP has adopted a tough line toward Europe. Its leaders have suggested that Greece should leave the euro, and that the EU mechanism for bailing out struggling countries should be dismantled. The Greens, on the other hand, are keen on deepening European integration; but that is not their first priority, and they are the smallest party at the table.

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Ultimately, the new government’s program will likely reflect the suspicion that other EU member states want to solve their problems with German money rather than domestic reforms. German politicians and opinion makers assess virtually every proposal for EU-level reform through this distributional prism. Schemes that are not intended to result in structural transfers are routinely dissected to confirm that they will not become cash dispensers for other EU members.

For example, Germans regard a joint budget not as a way to finance public goods such as research or infrastructure, but as a device to compel Germany to cover other countries’ expenses. Similarly, common unemployment insurance is regarded as a scheme to make Germans pay for unemployed Spanish or French workers. And a deposit-guarantee program for banks is seen as a way to force prudent German depositors to pay for non-performing loans in Italy.

To be sure, each of these concerns may be legitimate. All proposals certainly should be scrutinized to ensure that they will not be abused or introduce moral hazard. European solidarity is not a one-way street.

But, at the same time, German leaders must recognize that their exclusive focus on distributional effects is poisonous. They should recall the moment, in 1979, when British Prime Minister Margaret Thatcher marched into a European summit and said, “I want my money back.” The same logic was on display nearly 40 years later during the Brexit campaign, when “Leave” politicians falsely claimed that withdrawing from the EU would bring “money back” to the National Health Service.

Why has Gemrany become obsessed with the fear of paying too much? The EU budget contains much to criticize, but it hardly treats Germany unfairly. Germany may be the largest net contributor, but that is because it has the largest economy. As a proportion of national income, countries like Belgium, France, and the Netherlands also contribute a meaningful share of their net income.

German fears that the European Stability Mechanism serves as a channel for hidden transfers are similarly unfounded. Yes, the ESM benefits from low borrowing costs, which are essentially passed on to borrowing countries. If Greece cannot repay its debt, ESM shareholders will suffer a loss; and that risk is not priced into the interest rate Greece pays. But, so far, the ESM has continuously posted profits, and any loss it does suffer will be spread among all shareholders – including, for example, Italy. The ESM is a far cry from a subsidy machine financed by the German taxpayer.

Some in Germany also decry the so-called Target2 balances, which record bilateral surpluses and deficits of national central banks vis-à-vis the European Central Bank. The University of Munich’s Hans-Werner Sinn, for example, argues that the Target system has become a conduit for hidden operations to benefit debtor countries in southern Europe. True, in September, the Bundesbank had a net surplus of €878 billion ($1.2 trillion) vis-à-vis the ECB, whereas Italy and Spain ran deficits of €432 billion and €373 billion, respectively. These positions reflect the degree to which official flows are still substituting for private flows.

But, again, this arrangement has not cost Germany a single euro. On the contrary, the Target system is essentially a collective insurance scheme: if a national central bank were to default, the loss would be shared among all ECB shareholders. The system thus allows German exporters to continue to sell their products in southern Europe, because it guarantees that they will be paid. The claim that Germany loses from this is simply false.

It will always be in a political party’s interest to respond to the electorate’s fears. But politicians also have a duty to let voters know when their fears are excessive or unfounded. Europe needs a Germany that will veto half-baked proposals. But it also needs a Germany that can overcome its narrow obsessions and provide leadership.

With the current coalition talks, German leaders have an opportunity to assess new global developments that will have far-reaching implications for Europe and Germany alike. They must decide whether it is riskier to do nothing, or to take the initiative. No one is expecting a Damascene conversion. But one hopes for a government that will be more forthcoming in offering solutions.;

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