THE WALL STREET JOURNAL
JUNE 27, 2011
Is Germany Turning Into the Strong, Silent Type?
Its economic strength has foreign officials prodding Germany to take on greater international burdens. But the country's leaders are reluctant to accept that role.
By MARCUS WALKER
Germany is sitting on top of the world. But the rest of the world thinks it's getting too comfortable up there.
The country has come roaring out of the global financial crisis, boasting one of the strongest economies in the West and seemingly poised for years of rising exports ahead.
What's more, the better it does, the more the world expects it to do.
Europe and the U.S. want Germany to take charge on cleaning up Europe's debt crisis and do more for big causes—like supporting the Arab revolutions and the sputtering global economic recovery.
Germany's answer? Business as usual suits us fine.
Unlike many other Western countries,
Germany has spent years living within its means and building up a deep trade surplus. Now it's reluctant to bail out nations that weren't as prudent. And it doesn't want to get involved in foreign entanglements like Libya.
All of which leads to a question with big implications for the global economy and political order:
What is Germany's place in the world?
German leaders argue that they don't want to tinker with a winning formula, and they're already making significant contributions to the EU and NATO.
But critics see it differently. They attack the country for wanting to be a big Switzerland: a trading nation that profits from the business opportunities of a globalized economy but shirks the dirty work of globalization, including international involvement in armed conflicts.
Germany's traditional allies even fret that the country is losing interest in Europe and the West.
After all, when you've carved out a lucrative niche selling precision machinery and luxury cars to fast-growing emerging economies such as China, who needs stodgy old Europe?
"Germany is rising in a Europe that's coming apart at the seams," says John Kornblum, former U.S. ambassador to Berlin.
"How is this country—the only major economy in Europe that can keep up with globalization—going to fit into this Europe?"
A Changing Dynamic
Both NATO and the EU were built around Germany, by allies that wanted to bind Europe's strongest country into a multilateral structure. Germany, rueful of its history, also felt more comfortable inside their embrace.
Today's Germany, more confident of its own strength and virtue, exudes the sense that it no longer needs either alliance quite as much as it used to. Only 24% of Germans see more upsides than downsides to EU membership, while 31% see more downsides and 40% say it's a mixed bag, according to a survey published in German newspaper Die Zeit in March.
Berlin is also insisting on harsh bailout terms for Greece and Ireland, reflecting a cool cost-benefit analysis and Chancellor Angela Merkel's fine antennae for the public mood. Long gone are the times when Germany abided by the European consensus and gladly opened its checkbook for the common cause.
Meanwhile, Germany recently shocked its NATO allies by refusing to back their military intervention in Libya.
When the United Nations Security Council authorized the intervention in March, Germany abstained, along with China and Russia, instead of supporting the U.S., France and Britain.
Decisions like these have led critics to ask whether Germany is becoming an unpredictable country and an awkward partner. "This is an aging, sometimes crotchety society that wants to avoid risks and hang on to its money," says François Heisbourg, chairman of the International Institute for Strategic Studies in London.
Even President Barack Obama, who awarded Ms. Merkel the Presidential Medal of Freedom on June 7 while showering praise on her, tactfully suggested Germany could be doing more to help out with international conflicts.
A Job Well Done
Amid the widespread foreign criticism, German politicians argue that Germany remains a reliable Western ally, as shown by its 5,000 troops in Afghanistan. They insist that Germany remains committed to European unity—but that indebted euro-zone countries need tough love, not blank checks from Berlin.
"The European Union and the euro are Germany's heartfelt mission," Ms. Merkel said in a speech during a tour of Asia in early June.
The pressure on Germany to do more is an indirect compliment for a country with a revitalized economy.
As recently as 2005, Germany was being widely written off as yesterday's business model. Growth lagged behind the rest of the euro zone, the unemployment rate reached 12%, and public finances were a mess thanks to an overstretched welfare state.
E
conomists in the U.S. and U.K. said Germany was clinging to an outdated manufacturing base that couldn't possibly compete with lower-cost industries in China and Eastern Europe. The consensus view from outside the country was that Germany should deregulate its economy and seek more growth from financial services and consumer spending.
Under then-chancellor Gerhard Schröder, Germany did in fact rein in the welfare state, cut income taxes and partially deregulate the labor market. The unpopular reforms proved politically fatal for Mr. Schröder. But they revived the economy in combination with two other trends.
First, many German businesses made their own reforms, persuading their workers to forgo pay raises and adopt more flexible working practices. The changes made them more cost-efficient, while preserving their traditional strength: the quality of craftsmanship that allows manufacturers to charge extra for the words "made in Germany."
Second, global demand for German capital goods and cars began to surge as economic modernization gathered pace in Asia, Eastern Europe, Latin America and oil-producing countries.
The subsequent German revival stemmed from "good policy and good luck," says Barry Eichengreen, professor of economics at the University of California, Berkeley: "The good policy being wage moderation and the good luck being China."
The global financial crisis brought Germany's export juggernaut to a halt in 2009, when German gross domestic product shrank by 4.7%, a postwar record. But Germany's conveyor belts had merely paused. As world trade bounced back, the German economy grew by 3.6% in 2010, and a roaring first quarter of 2011 means GDP has exceeded precrisis levels.
'It Isn't a Miracle'
Problems still loom for the German economy, including the risk of a soft patch ahead for global growth and a shortage of skilled workers in the country that employers fear will worsen as Germany's population ages and shrinks.
But, for now, growth is expected to continue, and unemployment, at 6.1% and falling, is lower than before the financial crisis. That almost unique feat among Western countries is drawing admiration and curiosity from officials and economists, especially in the U.S., where joblessness remains stubbornly high.
"We got through the crisis better than almost any other country," says Michael Glos, former German economy minister and a conservative lawmaker in Ms. Merkel's ruling coalition.
"It isn't a miracle, it's because we stuck to manufacturing whereas other countries deindustrialized," he says.
The strong economy has boosted Germans' confidence in their own brand of capitalism. Its main elements: solid public finances, a balance between business flexibility and a strong social safety net, and a belief that well-made goods, not financial wizardry, are the foundation of prosperity.
Ms. Merkel touts this formula, which
Germans call the "social market economy," as an example that holds lessons both for the finance-heavy U.S. and U.K. and for overregulated, sclerotic members of the euro zone such as Greece and Portugal.
Foreign critics, though, want Germany to tinker with that formula. The nation's strong exports and weak consumption generate trade surpluses that are second only to China's in size. Since the financial crisis, Germany has come under pressure to raise its domestic demand through tax cuts or wage hikes, to give a helping hand to exporters in the rest of Europe and the U.S.
Few in Germany are listening.
Ms. Merkel argues that German consumers will open their purses of their own accord, if they are confident that the state's finances are sound. It's a controversial idea among economists, but it plays well politically with German voters, who tend to be culturally averse to debt, whether their own or the government's.
That's why the debt crisis around the euro zone's periphery, which has forced Germany to help bail out Greece, Ireland and Portugal, is causing so much anger. Many German voters, smarting from years of wage restraint and entitlement trimming, feel they're paying to prop up other euro nations that haven't made the same reform effort.
German politicians, playing to their home gallery, sometimes offend other euro nations—as when Ms. Merkel suggested recently that Southern Europeans waste too much time on vacation.
"Germany thinks it is entirely virtuous," says Mr. Heisbourg of the International Institute for Strategic Studies. As a result, he says, it can't see that the euro-zone bailouts, which are imposing drastic austerity on Greek and Portuguese citizens, are also rescues of German banks that lent too much money around Europe.
'Madame Non'
Ms. Merkel herself has become a flashpoint for critics. They accuse her of lacking the vision of former Chancellor Helmut Kohl, who saw European integration as a historic duty and a guarantor of peace in Europe.
But such lofty Euro-rhetoric is no longer effective, "because peace in Europe is no longer in question," says Volker Perthes, director of the German Institute for International and Security Affairs. "You need to explain to people, more than in the past, why burdens for German taxpayers are in their interests. This leads to a rhetoric of national interests that Kohl didn't use," Mr. Perthes says.
Last year, Ms. Merkel was criticized around Europe for holding up the euro zone's response to its debt crisis, earning the moniker "Madame Non" for her rejection of pleas for help. This spring, Ms. Merkel tried to take charge and solve the crisis.
She argued that only economic growth would lift euro nations out of their debts and proposed a package of structural reforms modeled on Germany's own recent overhaul. Among her ideas: All countries should raise their retirement ages and pass balanced-budget amendments.
The proposals, made after sparse consultation, came across as a Teutonic diktat, sparking a backlash even from Germany's usual EU friends such as Austria and the Netherlands.
In recent weeks, Berlin has caused further disquiet in Europe by pushing hard for a restructuring of Greece's bond debt. The plan would have cut the cost of saving Greece for German taxpayers. But the European Central Bank, backed by France, feared the measure would lead to a fresh financial panic in the euro's weaker members. Ms. Merkel backed down on June 17, agreeing to ask bondholders only for a "voluntary" contribution to the rescue of Greece.
"There are rising demands for Germany to show more leadership, but when Germany tries to do it, it gets criticized for being clumsy," says Mr. Perthes. "The U.S. is familiar with this leadership dilemma and has decades of experience in dealing with it. But for our political leaders, it's new," he says.
No Help in Libya
It isn't only the EU that's fretting about Germany's new unpredictability. NATO allies are worried by the revival of a pacifist stance under German Foreign Minister Guido Westerwelle.
German pacifism after World War II was long tolerated, even welcomed, in a Europe that had suffered from German militarism. But since the 1990s, Germany was supposed to become a "normal" country again, one that took part in multilateral interventions in war-torn places such as Kosovo and Afghanistan.
When the UN Security Council voted for military intervention in Libya, Germany abstained, breaking with its NATO allies. Germany even withdrew its ships from NATO naval patrols in the Mediterranean, since such patrols were now enforcing a UN-mandated arms embargo against Col. Moammar Gadhafi.
In a speech to Germany's parliament, Mr. Westerwelle denied the country was isolated, because it had voted the same way as "important countries and partners such as Brazil, India, Russia and China."
The implication was that in Germany's new foreign-policy doctrine, the BRICs—Germany's booming new export markets—are interchangeable with the West as Germany's partners, depending on the circumstances.
Many German lawmakers are uncomfortable with Mr. Westerwelle's policy, and Ms. Merkel has made efforts to repair relations within NATO. But opinion polls showed ordinary Germans want just as little to do with the Libya conflict as their foreign minister.
"Some Germans have become pacifistic and have forgotten about responsibility," says Mr. Glos, the conservative lawmaker. "Pacifism is cheap when others manage conflicts."
Plenty of other European countries are also inward-looking, says Ulrike Guerot, senior fellow at the European Council on Foreign Relations in Berlin. "But we Germans have to learn that we matter more than others in Europe," she says.
—Brian Blackstone and Mary M. Lane contributed to this article.
Mr. Walker is a staff reporter of The Wall Street Journal in Berlin. He can be reached at
marcus.walker@wsj.com.