Leading from a Position of Economic Strength

During the first two decades of the twenty-first century, Germany has emerged into a pivotal diplomatic role in the world. Why this premiere?

At a time when the EU and the United States were wrestling with massive national debt and crippling trade deficits, Germany had worked to balance its budget, and enjoyed strong manufacturing and exporting sectors.

Other nations began to look to Germany, and to its chancellor Angela Merkel, because it was one nation which seemed stable while others were floundering. Greece, Italy, Spain, Portugal, and Ireland became symbols for the EU’s economic woes.

The United States expanded its national debt in the years after 2008, hobbling its opportunities to provide prosperity for its own citizens or leadership for other nations. Germany’s foreign minister, Frank-Walter Steinmeier, writes:

Some politicians, such as the former Polish foreign minister Radek Sikorski, have described Germany as Europe’s “indispensable nation.” Germany has not aspired to this status. But circumstances have forced it into a central role. Perhaps no other European nation’s fate is so closely connected to the existence and success of the EU. For the first time in its history, Germany is living in peace and friendship with France, Poland, and the rest of the continent.

Germany’s leadership in the EU, and in the world, shows the way for other nations to move toward fiscal responsibility. Balancing national budgets is one step. Austerity – the word itself has become a political symbol – in social spending is another step.

To the extent that other nations can adopt German national virtues – industriousness, diligence, punctuality, craftsmanship, thrift – to this extent they will enjoy prosperity and stability they are so eager to mimic.

The Euro Crisis: German Leadership

When an economic crisis emerged in the European Union (EU) during the first decade or two of the twenty-first century, the EU was unable to exert itself to address the situation.

The EU had spent much of its energy and political capital in an effort to admit and absorb new member states. It had needed to persuade the existing member states to accept the new members; it needed to organize the new members for the EU structure.

The existing member states were somewhat skeptical of the new members, yet the EU was simultaneously attempting to persuade the existing member states to increase their commitment, involvement, and integration into the EU.

In 2005, member states chose not to ratify a proposed EU constitution. This decision took some momentum away from the EU’s political progress. It also become more clear that some of member states were economically incompetent.

The fiscal weakness, and deceptiveness used in attempts to disguise that weakness, threatened the stability of the EU as a trading bloc, and threatened the stability of the euro as a currency.

Greece became the symbol for the crisis, although several other member states had also been irresponsible. Greece had continued unsustainable programs, like nationwide single-payer universal healthcare, which created a large national debt.

With the EU itself lacking political momentum and diplomatic capital, member states looked to other sources for leadership during the crisis. They looked to Germany, and to Germany’s chancellor, Angela Merkel.

Germany’s foreign minister, Frank-Walter Steinmeier, writes:

During the euro crisis, meanwhile, Germany was forced to confront the danger posed by the excessive debt levels of some Mediterranean EU states. The overwhelming majority of the eurozone’s members and the International Monetary Fund supported plans to demand that countries such as Greece impose budgetary controls and hard but unavoidable economic and social reforms to ensure the eventual convergence of the economies of the eurozone.

Why did Germany emerge, reluctantly and even unwillingly, as a world leader in this situation? Because Germany had proven its ability to manage its own economy.

Many ‘first world’ or ‘industrialized’ nations had lost ground in trade wars. Some east Asian nations gained ground by violating intellectual property rights, by inhumane ‘sweatshop’ labor practices, and by ‘dumping’ and ‘flooding’ markets with low-priced products – selling products below cost in order to drive competitors out of the market.

In these circumstances, Germany had found a way to continue a significant and strong manufacturing sector, and to make money by selling its products, in both domestic markets and in export markets:

Germany has merely held its ground better than most of its peers in the face of rising competition.

The other member states of the EU naturally turned to Germany for leadership, because Germany had shown that it was able to keep a healthy manufacturing sector, both in the face of the trend toward an ‘information economy,’ and in the face of fierce Asian competition.

Germany Takes the Lead

During the first two decades of the twenty-first century, Germany has played an increasingly central role in the world, both economically and diplomatically. One reason for this emergence is that both the United States and the European Union have faced challenges which have depleted their political capital.

The United States had spent its resources dealing with increased threats from the Muslim world, and, after 2009, an increasingly aggressive Putin in Russia. Chinese expansionism in the South China Sea also absorbed American attention.

The EU encountered the challenges of absorbing a few – perhaps a few too many – new members states into its economic community, while attempting to encourage its existing members to deepen their commitments to the EU. Voters in EU member states rejected a proposed EU constitution in 2005, while newer member states gradually manifested symptoms of economic incompetence.

With both the United States and the EU otherwise engaged, the nations of the world looked to Germany, and to its chancellor Angela Merkel, for leadership. German foreign minister Frank-Walter Steinmeier writes:

Against this backdrop, Germany has remained remarkably stable. This is no small achievement, considering the country’s position in 2003, when the troubles of the United States and the EU were just beginning. At the time, many called Germany “the sick man of Europe.”

In this condition, Germany was an unlikely candidate for leadership. Steinmeier notes that “unemployment had peaked at above 12 percent, the economy had stagnated, social systems were overburdened,” and the German government had shown a too-lenient policy toward Putin’s Russia. The German federal court system later found that Germany had lost 1.2 billion euros, as the German government and the Russian government had not equally shared the burdens of projects undertaken in allegedly ‘equal’ partnership.

Within a remarkably short time, Germany turned itself around. The election of Angel Merkel as chancellor in late 2005, combined with a series of legislative reforms designed to trim back a too-generous set of government ‘handout’ social programs, allowed Germany to show its strength.

Those reforms laid the foundation for Germany’s return to economic strength, a strength that has lasted to the present day. And Germany’s reaction to the 2008 financial crisis only bolstered its economic position. German businesses focused on their advantages in manufacturing and were quick to exploit the huge opportunities in emerging markets, especially China. German workers wisely supported the model of export-led growth.

Germany’s quick climb to the top is reminiscent of an earlier such ascent. In the mid-1940s, at the end of WW2, Germany was so economically devastated that many observers thought that it would be permanently relegated to a ‘third world’ status.

Yet within a decade, Germany had rebounded so quickly that it was known as the Wirtschaftswunder – the ‘economic miracle.’

The first two decades of the twenty-first century may one day be known as a ‘miniature’ version of that Wirtschaftswunder. Whether or not that happens, Germany has in any case provided needed leadership for the EU during times of economic and diplomatic turmoil.

The next challenge for the EU, and for the world, is to manage the danger coming from the Islamic world. The EU faces desperate refugees seeking humanitarian aid and fleeing from violence in Muslim countries.

But hidden among those displaced persons are also violent jihadi extremists. The EU must find a way to distinguish between the innocent refugees and the Islamic extremists: a way to help the former and shut out the latter.

For this next great task, the EU, the United States, and Germany – the entire world, really, – will need courage, creativity, and leadership.