Ulrike Guerot of the European Council on Foreign Relations on Germany and Eurobonds

by Ike Swetlitz:

Courtesy of The European Council on Foreign Relations

When I think about economics on a day-to-day basis (who doesn’t?), I usually think about stock prices, unemployment, the consumer price index, and occasionally exchange rates. I check Google Finance and see figures that I think tell me how strong the economy is. I see countless headlines describing the rising and falling of the stock market. In short, I see numbers, usually indicating something about money. And I’m sure I’m not the only one who thinks about economics this way.

But Ulrike Guerot, a fellow at the European Council on Foreign Relations (ECFR) who spoke at a lunch colloquium hosted by the department of International Security Studies on Tuesday, October 4, would have us think otherwise.

“Economics is more than money,” she said. Instead of only focusing on numbers, she said, countries should focus on other factors, such as socioeconomics, emotional feelings, and national history when making and evaluating economic decisions.

The title of Guerot’s talk was “Is Germany Outgrowing Europe?” and she discussed the growing economic power of Germany within the European Union, and how recent events have impacted Germany’s relations with other EU member states. She began by detailing some of the differences between Germany and other European countries.

One of the major differences, Guerot said, is that Germany’s population, compared to that of the rest of Europe, is much older. According to the CIA World Factbook, 2011, the median age in Germany is 44.9 years, while the median age in France is 39.9 years, in Spain is 40.5 years, and in Poland is 38.5 years. Germany’s aging population leads them to pursue specific economics policies not in line with the rest of Europe, like ensuring a low rate of inflation.

Another demographic hitch is Germany’s generational divide. In 1989, the Berlin Wall fell and Germany was reunified. Those who grew up pre-unification were shaped more by the events of World War II and the Cold War, while those who grew up post-unification were shaped more by 9/11 and the economic crisis, according to an ECFR report that Guerot co-authored with Mark Leonard, the co-founder and Director of the ECFR, titled “The New German Question: How Europe Can Get The Germany It Needs,” published April 2011.

Even within the post-reunification generation, there is another split, Geurot said. Some benefit from the benefits of the EU, such as ease of travel, and others are less mobile. But even those who benefit take this united Europe for granted, as they grew up mostly in the era of a united Europe. So, they don’t think that Germany has to take an active economic or political role to hold Europe together.

Because Germany’s demographics are different in this respect than those of the rest of Europe, it pursues reforms on a micro level while the rest of European countries, which are more similar, pursue reforms on a macro level. This makes economic discourse between Germany and other European countries difficult.

And to Guerot, this is a big problem.

“Politics is not about rationality,” she said. “It’s precisely about discourse.”

Another factor limiting economic discourse is the short-term mindset of the German population with respect to economics. Consider the situation in Greece, for example. Germany, being Europe’s largest economy, according to the CIA World Factbook, 2011, is naturally looked to for bailout funds by other EU countries.

Guerot said that other countries think that even if they fall into debt crisis, Germany will save them anyway. These other countries are not accustomed to bringing their economic affairs in order. However, the German people are not enthusiastic about giving funds to countries like Greece.

The attitude of the German people is that “our banks are fine,” Guerot said. They think that even if Greece fails, German banks will still be able to survive because they are strong. So, the people are not enthusiastic to see Germany’s resources be sent to the Greeks.

This short-term thinking is much easier for the public to digest than is long-term economic planning. But on the long term, if Greece fails, then all countries who have invested in Greek banks will also be harmed, and this will harm many EU countries; this will eventually come back and hurt Germany. So it is in Germany’s best long-term interests to ensure the survival of Greece and other countries in similar positions.

At the end of the day, this comes down to cooperation and compromise between Germany and the rest of Europe. Another roadblock to this is Germany’s eastern focus.

Most parliamentarians from Germany travel to countries in the east, Guerot said, visiting Russia. Additionally, Germany dominates trade with eastern countries such as Russia and china, making up a majority of EU trade with Russia and slightly less than a majority with China.

As a result, Germany has a difficult time agreeing that it is necessary to work with and fortify Europe as an economic union when it has success in economic partnerships with other countries by itself.

But a true economic union is the direction in which Guerot thinks Europe must be headed. The right thing to do, Guerot said, is to move from the current system with a “no-bailout” clause to a eurobond community. Currently, the Maastricht Treaty contains an article, Article 103 in the Consolidated Version, that protects states from having to bail each other out. The European Central Bank’s website refers to this as the “no-bail-out clause”. Moving from this to a system of eurobonds would mean that European debt would be mutualized and sold as eurobonds, distributing the harm of the debt across all EU countries instead of concentrating it in the countries whose economies are struggling.

The ECFR report, “The New German Question,” details some reasons why Germany would benefit from bettering its relations with other EU countries.

According to the report, “senior German officials cite three sets of benefits: first, the ability to move forward in areas such as trade in which member states have pooled their sovereignty; second, legitimacy and an opportunity to avoid accusations of multilateralism; and third, a financial multiplier for its own initiatives towards non-European partners.”

This would improve Germany’s standing and reputation, bettering their relations with other countries as well, like Russia and Turkey. It would also reinforce the political power of the EU, allowing them to act as a balance for emerging powers such as China.

In addition to compromising with the EU economically, Guerot said that Germany must take a more politically active role. Currently the largest economy in Europe, Germany cannot shirk the political responsibility that accompanies this economic power. While German citizens are content being politically uninvolved, especially those in the post-reunification generation who take a united Europe for granted, onlookers aren’t.

So, the economic situation in the EU is much more complicated than just balancing exchange rates and evening out the charts. Demographics, mindsets, and history are entwined with a strained financial system. A successful solution will require compromise on all sides.