WASHINGTON — A new narrative is taking hold in U.S. public opinion, best expressed by Nobel Prize-winning economist and New York Times columnist Paul Krugman: Europe is in revolt. The French are. The Greeks are. Sunday’s elections were “referendums on the current European economic strategy.” Voters, adds the Washington Post, “redrew Europe’s political map Sunday in a powerful backlash against the German-led cure for the region’s debt crisis: painful austerity.” Half a dozen European leaders, or so the story goes, have lost their jobs as result of a voter backlash against European cut-and-reform policies. The poster children are the leaders of Italy and Spain, Ireland and Portugal, the Netherlands, France, and Greece.

So let’s review the evidence. Prime Minister Silvio Berlusconi of Italy did not have to quit because of his unpopular austerity policies. Quite the opposite, he was pushed out of office last year because he did not cut expenditure or reform the labor market and thus brought his country to the brink. Voters in Portugal, Ireland, and Spain did throw out pro-reform and pro-austerity governments. But they replaced them with leaders who are equally committed to deficit reduction, structural reform, and sustainable growth. The Dutch government did fall because anti-immigrant, anti-austerity populists withdrew their support of the ruling coalition. But the Dutch debate is not between austerity and deficit spending. It is about how to urgently balance the budget, and nothing suggests that the Dutch find their basic economic strategy wanting. Leaving aside France and Greece for a moment, there seems to be enough evidence to suggest that more factors are at play than simple pushback against the cutters and slashers. Two possible explanations suggest themselves.

First of all, anti-incumbency is a strong force during times of economic distress. Americans know this phenomenon well, and every analyst of the U.S. presidential race will quote unemployment numbers as a determining factor. So, why not look at Europe in the same way? It turns out that leaders of countries that weathered the economic crisis well have a good chance of being reelected. Examples? Sweden, Poland, and Germany. However, in countries with growing unemployment and shrinking economies a “throw-the-bums-out” sentiment tends to predominate. This helps to explain why voter volatility and anxiety might produce a change in personnel, but not always a dramatic shift in economic philosophy. In fact, although the number of people affected by austerity has risen and, consequently, so have frustrations with this policy, no credible mainstream policy alternative has emerged. Certainly, a growing minority of voters cast their ballots with fringe groups to register their protest. Yet, nothing suggests so far that the center in the core countries is not holding.

Secondly, a period of political rebalancing is in the cards for Europe. For the past few years, Europe has largely been governed by the center-right. See Britain and Germany, France and Holland, Spain and Portugal. Italy’s technocratic government isn’t exactly left-wing, and neither is the European Commission under President José Manuel Barroso. Such unison of political preference will not last forever.

This is where France comes in. Clearly, voters wanted a change. Some did not feel well-represented by an erratic personality such as Nicolas Sarkozy. Some fundamentally opposed austerity. But another large group feels like many moderate European socialists and Social Democrats traditionally do: they want to be administered with a basic sense of social justice  — especially when the social safety net needs to be cut. Francois Hollande, now president-elect of France, has appealed to this sense of fairness throughout his campaign. That’s what his proposal to tax the super-rich at a 75 percent rate is all about, that the burden of upcoming budgetary adjustments should not be borne by the ordinary citizen alone.

The program that the French electorate endorsed is a far cry from a rejection of austerity. Hollande wants to balance the budget a year later than Nicolas Sarkozy would have. That’s a marginal difference masquerading as a difference of principle for the purposes of a campaign. Hollande wants to increase the capital of the European Investment Bank (EIB). If the lending capacity is boosted along the lines of his proposal, the EIB will be able to spend the rough equivalent of 0.1 percent of Europe’s economic output. Not exactly the type of stimulus that Paul Krugman and the U.S. proponents of borrow-and-spend would like to see. Francois Hollande will not end Europe’s cut-and-reform policies, but will rebalance them, thereby prolonging austerity’s limited half-life.

Which leaves just Greece to be explained. Here, there is no doubt: The Greeks are indeed in revolt against austerity and, quite appropriately, their established political class. But Greece is an outlier. In terms of state structure, competitiveness, solvency, willingness to adjust, and now voter preference, it remains the European exception. But that is not enough to prove the case of the impending end of austerity in Europe.

Thomas Kleine-Brockhoff is a Senior Transatlantic Fellow who leads the German Marshall Fund’s EuroFuture Project in Washington, DC.

WARSAW / WASHINGTON – For hundreds of years, Poland suffered from an overbearing Germany that trampled on the rights of the Polish nation, occupied the country, and, at times, worked to extinguish the Polish nation-state entirely. No wonder that there is a residue of skepticism and caution in Poland when it comes to relations with its big neighbor to the west. A healthy distance and dose of hedging have long been the default position of the country’s foreign policy. Poland’s accession to the European Union has changed all that. Nearly eight years on, Poland is rephrasing its German question, and in a baffling way: how close is too close?

Last week, Poland consented to a European agreement that it did not like in the interest of keeping the continent together. European leaders had agreed on a fiscal compact, a treaty aimed at strengthening the fiscal discipline in the EU countries that choose to sign it, and set governing rules for the eurozone. Prime Minister Donald Tusk faced an uncomfortable choice. On one hand, Poland has declared itself a staunchly pro-European country. In his now-famous Berlin speech last year, Polish Foreign Minister Radek Sikorski spoke of the need for a strong, united, and even federal union. On the other hand, the eurozone was potentially moving ahead without Poland. The plan shaping up ahead of the summit called for meetings of the 17 eurozone countries, excluding Poland from what is seen in Warsaw as a vital decision-making body of a changing EU. Consequently, Tusk threatened Poland might not sign the treaty if this mechanism was not changed.

In Warsaw, eurozone summits are not simply seen as a crisis management mechanism for the euro, but as a nucleus of a smaller club in which most of the key decisions for the EU are made, some in areas beyond the single currency. France is the most active proponent of eurozone-only solutions, and a zero-sum game between France and Poland has developed around the question of a two-speed Europe. Warsaw fears that France wants to undo the EU’s eastern enlargement. Seen from Warsaw, inclusion is a core national interest; Poland did not join the European Union only to find itself sidelined.

The other eurozone members faced a dilemma of their own. No democratic theory stipulates that nonmembers ought to have voting rights in membership organizations. Since voting rights for nonmembers are out of the question, the group considered the PNV principle — “participate, not vote.” But even speaking rights would give nonmembers the opportunity to influence, and maybe even undermine, goals that member states deem essential to sustaining their common currency. Nonmembers should not benefit from the currency union while not contributing to it, and nonmembers should have an incentive to join. But strict exclusion of nonmembers is in nobody’s interest. Some nonmembers are really “not-yet-members.” They are, like Poland, candidate countries working to qualify and waiting for the right moment to join. They have a right to know what’s going on in the club they are aspiring to join. The more the eurozone coordinates to save its currency, the more it will make decisions that affect all 27 EU members. They might pertain to competitiveness, social systems, and taxes.

Keeping Poland in the cold is least of all in Germany’s interest. Poland is the most pro-European country outside the eurozone. Why alienate it? Last weekend, Germany got a taste of what that might mean when Sikorski warned that Germany should not even try to aspire to be a benevolent hegemon. Poland is Germany’s crucial ally for a more federal Europe and a power to help balance the less ambitious Brits and the more confederate French. Poland is essential in order to lead Central and Eastern Europe towards the eurozone and prevent Europe from splitting in two. It has rarely had a more central role in Europe and has never been a more pivotal partner of Germany.

In true European fashion, this led to a compromise, albeit an ugly one. The agreement allows non-eurozone countries to take part in the eurozone summits at least once a year, and whenever issues of competitiveness or the architecture of the eurozone are discussed. Additionally, Herman Van Rompoy, president of the European Council, assured that any summit of the euro 17 will be preceded by a meeting of all EU 27 member states.

An unhappy Tusk contends the agreement still establishes a decision-making format in which Poland does not have a vote, and frequently will not even be present at the deliberations. Nonetheless, Poland decided to join the other 24 signatories (the U.K. and the Czech Republic were the holdouts), marking yet another time that Poland chose “more Europe” when presented with a choice. The Europe Poland is choosing is less and less to its liking, but it is easier to influence the club from the inside than from the outside.

Despite a building relationship with Germany, Warsaw’s support of Berlin’s leadership in Europe is anything but unconditional: “Provided you [Germany] will include us in decision-making, Poland will support you,” Sikorski emphasized in his Berlin speech. Poland knows that it cannot always count on the unwavering support from its western neighbor, especially if Germany had to choose between Poland and France. Tusk’s goal now is to broaden Poland’s alliances within the eurozone, starting with Spain and Italy. Germany will have to earn Poland’s support.

Michal Baranowski  is the Senior Program Officer for Foreign Policy and Civil Society in the German Marshall Fund’s Warsaw office. Thomas Kleine-Brockhoff is a Senior Fellow and Senior Director for Strategy at GMF’s Washington, DC office.

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WARSAW / WASHINGTON – For hundreds of years, Poland suffered from an overbearing Germany that trampled on the rights of the Polish nation, occupied the country, and, at times, worked to extinguish the Polish nation-state entirely. No wonder that there is a residue of skepticism and caution in Poland when it comes to relations with its big neighbor to the west. A healthy distance and dose of hedging have long been the default position of the country’s foreign policy. Poland’s accession to the European Union has changed all that. Nearly eight years on, Poland is rephrasing its German question, and in a baffling way: how close is too close?

Last week, Poland consented to a European agreement that it did not like in the interest of keeping the continent together. European leaders had agreed on a fiscal compact, a treaty aimed at strengthening the fiscal discipline in the EU countries that choose to sign it, and set governing rules for the eurozone. Prime Minister Donald Tusk faced an uncomfortable choice. On one hand, Poland has declared itself a staunchly pro-European country. In his now-famous Berlin speech last year, Polish Foreign Minister Radek Sikorski spoke of the need for a strong, united, and even federal union. On the other hand, the eurozone was potentially moving ahead without Poland. The plan shaping up ahead of the summit called for meetings of the 17 eurozone countries, excluding Poland from what is seen in Warsaw as a vital decision-making body of a changing EU. Consequently, Tusk threatened Poland might not sign the treaty if this mechanism was not changed.

In Warsaw, eurozone summits are not simply seen as a crisis management mechanism for the euro, but as a nucleus of a smaller club in which most of the key decisions for the EU are made, some in areas beyond the single currency. France is the most active proponent of eurozone-only solutions, and a zero-sum game between France and Poland has developed around the question of a two-speed Europe. Warsaw fears that France wants to undo the EU’s eastern enlargement. Seen from Warsaw, inclusion is a core national interest; Poland did not join the European Union only to find itself sidelined.

The other eurozone members faced a dilemma of their own. No democratic theory stipulates that nonmembers ought to have voting rights in membership organizations. Since voting rights for nonmembers are out of the question, the group considered the PNV principle — “participate, not vote.” But even speaking rights would give nonmembers the opportunity to influence, and maybe even undermine, goals that member states deem essential to sustaining their common currency. Nonmembers should not benefit from the currency union while not contributing to it, and nonmembers should have an incentive to join. But strict exclusion of nonmembers is in nobody’s interest. Some nonmembers are really “not-yet-members.” They are, like Poland, candidate countries working to qualify and waiting for the right moment to join. They have a right to know what’s going on in the club they are aspiring to join. The more the eurozone coordinates to save its currency, the more it will make decisions that affect all 27 EU members. They might pertain to competitiveness, social systems, and taxes.

Keeping Poland in the cold is least of all in Germany’s interest. Poland is the most pro-European country outside the eurozone. Why alienate it? Last weekend, Germany got a taste of what that might mean when Sikorski warned that Germany should not even try to aspire to be a benevolent hegemon. Poland is Germany’s crucial ally for a more federal Europe and a power to help balance the less ambitious Brits and the more confederate French. Poland is essential in order to lead Central and Eastern Europe towards the eurozone and prevent Europe from splitting in two. It has rarely had a more central role in Europe and has never been a more pivotal partner of Germany.

In true European fashion, this led to a compromise, albeit an ugly one. The agreement allows non-eurozone countries to take part in the eurozone summits at least once a year, and whenever issues of competitiveness or the architecture of the eurozone are discussed. Additionally, Herman Van Rompoy, president of the European Council, assured that any summit of the euro 17 will be preceded by a meeting of all EU 27 member states.

An unhappy Tusk contends the agreement still establishes a decision-making format in which Poland does not have a vote, and frequently will not even be present at the deliberations. Nonetheless, Poland decided to join the other 24 signatories (the U.K. and the Czech Republic were the holdouts), marking yet another time that Poland chose “more Europe” when presented with a choice. The Europe Poland is choosing is less and less to its liking, but it is easier to influence the club from the inside than from the outside.

Despite a building relationship with Germany, Warsaw’s support of Berlin’s leadership in Europe is anything but unconditional: “Provided you [Germany] will include us in decision-making, Poland will support you,” Sikorski emphasized in his Berlin speech. Poland knows that it cannot always count on the unwavering support from its western neighbor, especially if Germany had to choose between Poland and France. Tusk’s goal now is to broaden Poland’s alliances within the eurozone, starting with Spain and Italy. Germany will have to earn Poland’s support.

Michal Baranowski  is the Senior Program Officer for Foreign Policy and Civil Society in the German Marshall Fund’s Warsaw office. Thomas Kleine-Brockhoff is a Senior Fellow and Senior Director for Strategy at GMF’s Washington, DC office.

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WASHINGTON–Mitt Romney, one of the leading Republican U.S. Presidential candidates, has informed his countrymen over the past few weeks that U.S. President Barack Obama is working to turn the United States into Europe. This, one might think, is good news. Presumably it suggests that a unified “West” is closer to becoming a reality. The president, someone in Washington D.C., is working for ever greater convergence in the world’s greatest alliance. After decades of unabashed Americanization of Europe, it seems, the tables are turning. In due time, the need for transatlantic learning and knowledge transfer between friends and partners will be obsolete. We will all be one happy family.

Indeed, from the perspective of a Republican presidential candidate there is much to like about Europe these days. After all, Europe is largely run by fellow conservatives. They preach and (increasingly) practice fiscal responsibility and structural reform to fix the ills of the continent — a strategy candidate Romney calls on President Obama to embrace.

Let’s pause right here and stop fantasizing. The reality is quite different. Yes, Mitt Romney sees the United States as being transformed into another version of Europe. But in Romney’s eyes that’s no compliment, rather it’s an insult. Romney contends that under Obama, a “European-style welfare state” is America’s destiny. Or, in another version of this horrific vision that permeates most of the candidate’s campaign speeches, “a European-style entitlement society.” Obama, according to Romney, “takes his inspiration from the capitals of Europe; we look to the cities and small towns of America.” Learning from Europe seems to “poison the very spirit of America.” Fellow Republican candidate Rick Santorum agrees, claiming that Obama is “trying to impose some sort of European socialism on the United States.” Not to be outdone, candidate Newt Gingrich, in his South Carolina victory speech on Saturday night, detected the emergence of a “brand new, secular European-style bureaucratic socialism” in America.

So, why are the Republican presidential candidates running against Europe rather than against each other? Why is Europe a dirty word in this campaign? First of all, the vilification of Europe is not a new phenomenon in U.S. politics. Remember the “cheese-eating surrender monkeys”? That epithet, common during the debate about the intervention in Iraq in 2003, referred to the French, for whom the worst abuse is traditionally reserved. The French, often linked with the Germans to form an alliance of “Euroweenies,” chose to sit out the war against Iraq’s weapons of mass destruction and were thus scolded for having lost their “moral compass.” That incident happened barely ten years ago, but one might go back hundreds of years and still detect the same type of argument about Europe. As Princeton historian Linda Colley has pointed out, Americans have traditionally understood their history, culture, and identity in contrast to Europe’s. The United States was founded as the antidote to Europe. The old continent was “the other,” against which to define oneself. The history of immigration helped to entrench the view that one side of the Atlantic was intrinsically better and more blessed than the other. European decadence was replaced by “authentic Americanism.” Europe, as described by the novels of Henry James, was both corrupt and corrupting. “America was a country of innocence, virtue, happiness, and liberty as against a Europe of vice, ignorance, misery, and tyranny,” writes historian C. Vann Woodward. Thus, it was anti-Europeanism that reinforced the new idea of U.S. exceptionalism.

Initially, Anti-Europeanism has risen in combination with an inferiority complex vis-a-vis the supposedly culturally superior Europeans. Certainly, World War II and Europe’s inability to solve its own problems at that time cured Americans of any sense of humility. Since the Cold War, anti-Europeanism has by no means been a U.S. obsession. It has come and gone in waves and has only established itself as a staple of the intellectual life of one wing of U.S. conservatism, just as its sibling, European anti-Americanism, found its home mostly on the political left. The Eurobashers on the U.S. right use a few standard leitmotifs to make their case against the “EU-nuchs” whose “values and spines have dissolved in a lukewarm bath of multilateral, transnational, secular, and postmodern fudge,” to quote the ironic characterization of writer Timothy Garton Ash. At times, anti-Europeanism can be quite funny, especially when skillfully expressed by George W. Bush who famously said: “The problem with the French is that they don’t have a word for entrepreneur.”

The question is how seriously to take all of this Eurobaloney? In this Republican presidential primary campaign, Europe has been nothing but a foil. Anti-Europeanism has been a code word for anti-liberalism.  At the same time, Americans have long appealed to European politicians not to pander to the anti-American segments of the European public, fearing that fleeting prejudice could turn into lasting chauvinism. Gerhard Schroeder, then-German Chancellor, earned condemnation in the United States when he played to the pacifist anti-Americanism of his electorate to gain re-election in 2002. Should Mitt Romney, Newt Gingrich, and the rest of the Republican candidates really be held to a different standard?

Thomas Kleine-Brockhoff is a Senior Fellow and Senior Director for Strategy at the German Marshall Fund of the United States 

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CAMDEN, Maine – Once again, Europe’s leaders did not brandish the big bazooka that the markets are crying out for. Instead, Europe is doggedly pursuing its step-by-step approach as introduced several summits ago. Given the continuing disconnect between markets and politicians, we know from experience what will likely happen next: After an initially favorable response, the markets will realize that the latest comprehensive plan wasn’t all that comprehensive; that there are not enough short-term crisis resolution measures in Friday’s package to reassure investors about the safety of their assets; and that long-term fixes are impressive, but incomplete. Soon, politicians will scramble for what to do next to prevent a market meltdown.

Therefore, it is already time to map out the next steps. There are at least five:

1. Ensure European Central Bank (ECB) intervention: ECB President Mario Draghi has welcomed the results of the summit because they enforce spending discipline among the countries that use the euro. This positive outcome should reassure Draghi that temporarily enlarging the balance sheet of the ECB is acceptable when the goal is to keep the borrowing costs of southern European countries at a sustainable level. Increasing the volume of the bond purchases on the secondary market when necessary will go a long way toward communicating to the markets that no European country will let the euro fail and that the ECB will provide the bridge funding until the structural reforms work.

2. Prepare a eurobond proposal that Germany can accept: The original draft of the summit’s final statement called for eurobonds. On German insistence, the paragraph was struck from the draft. But German opposition is not as ironclad as it seems. Chancellor Angela Merkel has not said “no, never,” but rather “not now.” She sees eurobonds as the capstone of the European edifice. Last week’s summit results ensure that countries cannot borrow irresponsibly in the future while betting on a European bailout. This outcome should ameliorate Germany’s concern about moral hazard and allow the country to take steps toward formally assuming the joint and several liability that it already has in practice. The temporary “debt redemption fund” that the German Council of Economic Advisors proposed has the best chance of being politically acceptable.

3. Convince the United States to increase the IMF’s firepower: During the summit, the Europeans decided to funnel an additional $ 270 billion through the IMF to help build a wall of money around Spain and Italy in order to contain financial contagion. That’s good, but not enough. U.S. President Barack Obama has said that Europe has enough money to help itself. But the numbers don’t add up. To cover the borrowing needs of Spain and Italy for the next three years (the timespan needed for an adjustment program), $2 trillion will be required. The United States wants Germany to cover the lion’s share of that amount. But Germany is too small to carry such a load. German guarantees for its neighbors already excide next year’s federal budget by 80 percent, and debt already exceeds 80 percent of GDP. The IMF has a remaining lending capacity of $380 billion, now propped up by the Europeans to reach about $650 billion. Clearly not enough. After having travelled to Europe last week to pressure the locals, U.S. Treasury Secretary Timothy Geithner should now travel to Capitol Hill to convey the bad news. No longer do the Americans have the choice whether or not to spend U.S. taxpayer money to address the European crisis. The question is rather whether they would like to pay for the crisis by way of increasing the IMF’s firepower or by way of the global recession/depression that a collapse of the euro would inevitably cause.

4. Work on a growth agenda for Europe: So far, crisis resolution measures have focused on debt and banks. In order to avoid a repeat of the current predicament, Europe needs to rebalance and grow. The next steps toward a fiscal union, as well as the reform packages in the southern countries, need to focus on growth and the restoration of competitiveness. Northern Europe will need to play its part to allow for the adjustment.

5. Bring in Britain from the cold:  No Europe without Britain. If British Prime Minister David Cameron’s veto against fiscal union is the first step toward Great Britain leaving the European Union, the summit will have been a pyrrhic victory for the euro-integrationists.  Therefore, the countries that agree should present another offer to the dissident from the island. On the face of it, David Cameron’s request for safeguards for the British financial industry is not unreasonable as long as it does not require undoing the structural changes toward fiscal union. Only when Britain remains inside the tent will countries like Hungary, the Czech Republic, and even Sweden be enticed to stay there as well.

The financial markets might accept that no bazooka will be deployed as long as there is a credible plan for the next steps to be taken. “Step-by-step” should not be misunderstood to mean “stumble along.”

Thomas Kleine-Brockhoff, a Senior Transatlantic Fellow and Senior Director for Strategy, directs the German Marshall Fund’s EuroFuture Project.

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BERLIN – The economic news from this blessed country in the heart of Europe are, well, not great. But then again, they could be worse.  Certainly compared with the outlook of all these other foreign and distant countries that form the rest of continent called Europe. Just look at Die Welt, the conservative daily, which reports the latest economic outlook of the OECD like this: “Germany is strong even in the midst of crisis.” While the OECD predicts what Die Welt calls a “light recession,” it assures the readers that this recession is only of “a technical nature.”

Why technical? Because during the next quarter, the economy will just shrink by 0.1 percent and by a barely measurable 0.075 percent in the following quarter. According to Die Welt, this is what economists call a “red zero.” For the remainder of 2012, the outlook is bright, with growth “above average.” Somewhere buried in the third paragraph does the reader learn that rest of Europe is sliding into a recession that not even this newspaper can call “technical.” And, that recession is far away, in foreign territories. Germany is indeed a blessed country.

It is in this public environment that Radoslaw Sikorski, Poland’s foreign minister, delivered his “Berlin speech.” In the capital of a country that enjoys the lowest unemployment rate in decades, Sikorski warned that Europe is “on the edge of a precipice.”  Yet, the crisis is something that Germans only know from reading the newspaper – if at all. How are they to understand a sentence like this: “The breakup of the eurozone would be a crisis of apocalyptic proportions”?

If is therefore understandable that the most relevant criticism of Sikorski heard in Berlin the morning after is directed at what locals perceive of as exaggerations. Is it really that bad? Break up? Come on. Isn’t Sikorski an alarmist of sorts?

So, let’s turn this around and assume that Sikorski is not an alarmist, but knows full well what he is talking about. But that, conversely, the echo chamber of Germany’s national conversation has produced an intolerable complacency. It would then be the merit of Sikorski’s wake-up call to have alerted the German public to the reality of their responsibility for the travails of the eurozone.  Maybe the most important moment of his speech came when he reminded the audience that, despite Germany’s “understandable aversion to inflation,” the country would have to “appreciate that the danger of collapse is now a much bigger threat.” Maybe five individuals in the audience applauded. Other than that, there was complete and deafening silence. The audience wanted none of it. They did not want to hear the distinction of a problem of the first- and one of the second-order.

Radoslaw Sikorski said what needed to be said. And he said it where it needed to be said and when it needed to be said. Will the Germans hear him?

Thomas Kleine-Brockhoff, a Senior Transatlantic Fellow and Senior Director for Strategy, leads the German Marshall Fund’s project on the financial crisis.

Image by Dirk Enters, DGAP.

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WASHINGTON — If the euro fails, the blame will not be on Greece, but on Germany. Europe’s economic powerhouse is now seen as the only force that can prevent a continental meltdown that would result in defaults, disintegration, and decline. As the Bundestag, Germany’s parliament, prepares for Thursday’s crucial vote on more guarantees for the expanded European Financial Stability Facility (EFSF), concern is mounting: is Germany ready to provide bold leadership? The question is not simply whether the Germans will cut another check to save Europe. A fundamental transatlantic and transcontinental divide about prudent economics informs and infests the debate about crisis resolution. And it threatens to create a standoff during this most dangerous of moments.

Most German economists doubt the proposed strategy first outlined by former U.S. Treasury Secretary Hank Paulson: “If you have a bazooka in your pocket and people know it, you probably won’t have to use it.” He referred to a weapon potent enough to force financial markets into submission. All subsequent bailout packages and guarantee programs followed that bazooka logic. But nearly every time, the loan and guarantee amounts needed to be revised upward as market pressures continued. This week is no different. While the Bundestag is being asked to increase German liability in a euro bailout to €211 billion (up from €123 billion), the debate in financial markets is whether the rescue fund’s capacity of €440 billion is sufficient. Many American economists suggest it should be doubled, tripled, or — through leveraging — quintupled. German parlamentarians chafe at the suggestion. Hadn’t they been told this was the last and final rescue package on which they would have to vote? Wouldn’t limitless bailouts and guarantees endanger the savior rather than help the countries in need?

In the end, the debate boils down to philosophical alternatives; it’s Keynes vs. Hayek, contagion vs. moral hazard, expansion vs. austerity. The German side bases its conviction on a domestically dominant school of thought called ordoliberalism, developed at the University of Freiburg by Walter Eucken and, to some degree, by Friedrich Hayek. The theory holds that the state must establish a proper legal environment for the economy. It creates order by setting rules on how market forces ought to work — and then sticks to them. Therefore, discretionary government interference in the market should be limited. The central bank’s mission should be confined to fighting inflation, thus avoiding the politicization of the institution.

On German insistence, the framework for the European Monetary Union was modeled on these principles. Each member state would comply with a set of rules, especially on debt and deficits. If the rules were broken, it meant that there were not enough rules. And they needed to be armed with punitive sanctions against violators. Moral hazard should be avoided at all cost. A debt crisis, in the German mind, is therefore best addressed by rooting out the underlying problem. A debt crisis is certainly not resolved by piling on more debt. Instead, a state should engage in structural reforms, reducing the deficit by spending cuts and tax increases. In short: austerity.

An orthodox ordoliberal would understandably think the devil has descended onto earth in the guise of Larry Summers, U.S. President Barack Obama’s former economic advisor. Consider his recipe for crisis resolution that continues to represent the mainstream thinking within the Obama administration: “It is the central irony of the financial crisis — caused by too much confidence, borrowing and lending, and spending — that it cannot be resolved without more confidence, more borrowing and lending, and more spending.” From this vantage point, the German response to the crisis has been tepid and government incrementalism futile.

Indeed, the central contradiction of the German crisis response is its insistence on the long-term at the expense of the short-term. In fact, some German recipes have made crisis resolution more difficult. Punitive interest rates for loans to Ireland, Portugal, and Greece may avoid moral hazard, but will increase rather than lower these countries’ debt burden.

This contradiction is best represented by Angela Merkel. The chancellor is anything but an ideologue. She has combined a moderate bailout strategy with German economic principles. Her incrementalism is more than just muddling through. Buying time for Greece has made sense, to a degree — it has allowed her to bring doubters around to support the previously unthinkable, it has allowed southern Europeans to lock in structural reforms, and it has allowed banks to sell off or partially write off southern European bonds. At the same time, the strategy has fallen short. Time was wasted by not sufficiently reforming the banking system and increasing its liquidity, not properly building firewalls to avoid contagion in the event of an eventual Greek default, and not aggressively focusing on growth.

Now Merkel is approaching the ultimate decision point. It’s bazooka or default. The problem with the bazooka is that it could destabilize the core of the six European triple-A-rated countries, thus becoming the ultimate path of contagion. The problem with default is that it currently ensures contagion. So far, Germany’s economic establishment has predictably responded by saying nein to the bond-buying program of the European Central bank, nein to Eurobonds, nein to a banking license for the EFSF, and nein to an insurance scheme to leverage the rescue pool. But a simple no is not a sufficient answer when Europe is hovering on the edge of the abyss. A German plan is needed, and now. This is the hour for leadership. History is calling, Madam Chancellor. Will you answer?

Thomas Kleine-Brockhoff is a Senior Transatlantic Fellow with the German Marshall Fund of the United States in Washington, DC.

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WASHINGTON — Barack Obama finally succeeded in uniting the world – just not the way he intended.  At the G-20 summit in Seoul, countries almost universally rejected America’s ideas for correcting current-account imbalances as well as its second round of quantitative easing (QE2). After an electoral shellacking at home, the U.S. president suffered a diplomatic shellacking abroad. It was one of the darker hours of American economic diplomacy.

For years, the United States has criticized China for its unwillingness to allow the renminbi to appreciate. The undervalued Chinese currency is a key driver of America’s large and growing trade deficit with China. It is therefore justified to call the Chinese behavior “currency manipulation.” And it is not even the only tool with which the country’s authoritarian government artificially improves the competiveness of its economy at the expense of others in the global marketplace.

Rather than developing a common front against the Chinese manipulators, the United States chose to expand the argument and turn on all surplus countries – thereby assuming that all surpluses are created equal. Germany is the poster child of America’s drive against nefarious surpluses. But that country’s sizable trade surplus does not stem from tinkering with its currency. The euro is floating freely. The surplus is not based on wages that the government artificially depresses. Workers enjoy some of the highest wages and best benefits in the world. Germany is not holding back in domestic demand for goods and services. While this year’s growth spurt has initially been attributed to the country’s export prowess, domestic demand is currently responsible for well over half of economic growth. Claims that Germany engages in beggar-thy-neighbor policies vis-à-vis its European partners are equally spurious.  Germany’s economic revival is restarting growth across Central Europe thanks to closely integrated supply chains that link Eastern European firms to German companies.

The simple truth is that Germany has built the most competitive economy in the eurozone.  The country’s success as an exporter is based on the values of democratic capitalism. That’s a far cry from China’s authoritarian capitalism. The Obama administration (and legions of analysts across America) keep lumping both countries together – a case of doubtful analysis that triggers bad politics.

In Seoul, even the other countries of the G-20 were not very receptive to the Obama administration’s onslaught. America’s argument for rebalancing has always rested on shaky ground. The Carnegie Endowment’s Uri Dadush and Vera Edelman have beautifully described the contradictions: “Here was the country responsible for the greatest consumption and construction binge in history declaring things must change; that other countries should mend their ways, relying less on lending to the United States and more on their own spending; that U.S. exports would double in five years, and that the rest of the world’s currencies must appreciate to help out.”

In order to support its case, the United States intends to print money to the tune of $600 billion. This glut of greenbacks will create a new asset bubble and has already  inspired or legitimized new capital controls in emerging economies like Indonesia and Brazil. And it will leave the euro as the only major currency that is not currently manipulated downward.

America’s actions undercut its president’s pleas to the world. Lectures about macroeconomic virtue sound dangerously hollow. They are reminiscent of American presentations about the importance of human rights in the age of Guantanamo and Abu Ghraib.  The immediate effect in Seoul was the spontaneous emergence of a G-19, with the odd bedfellow of a Sino-German alliance at its core. The tone reached a fever pitch when German finance minister Wolfgang Schäuble called U.S. policy “clueless.”

While America’s argument about the Chinese currency may be valid, it is also a distraction.  America does not only have a bilateral trade deficit with China, it has a multilateral trade deficit with most of its important partners. Not only is Chinese currency manipulation hurting America; it is America’s own lack of competitiveness that is hurting America. There are just not enough goods and services to export that the world wants. Which is why the argument about rebalancing is, at best, one-sided. It assumes that balanced trade is desirable and surpluses are just as bad as deficits when, in fact, deficits are worse. They point to weaknesses in the domestic economy. These weaknesses need to be corrected. That is the task at hand, and the Obama administration has, so far, not given an indication that it is up to the task. It should make goods, not dollar bills. It should cut its deficit, not the value of the dollar. Last week, the co-chairmen of the president’s deficit commission came up with a set of recommendations for painful cuts. That’s a start. In the spirit of the commission, the United States should stop pointing fingers at its democratic peers and instead start doing its homework.  Then and only then will America be able to rebuild the credibility of its global economic leadership.

Thomas Kleine-Brockhoff is Senior Director for Policy Programs at the German Marshall Fund.

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WASHINGTON — Angela Merkel, German chancellor, is said to be the most powerful woman on earth. But even by these standards, the global media tsunami that followed her remarks about the failure of multiculturalism in Germany must have caught her by surprise. Her every word was dissected in every corner of the world, and here is how that reads: The Australian found that Merkel “rejected the idea of cultural pluralism.” Columnist Esther J. Cepeda of the Washington Post Writers Group understood that Merkel called “the very idea” of immigrants living “happily side by side” with native-born Germans “an illusion.” Russia’s RT TV asked, “Is diversity dead?” The Miami Herald translated her remark to mean, “Muhammad, go home.” And, adding some historical gravitas, the paper concluded, “We should all be alive to the grim historical resonance of a German chancellor declaring the idea of disparate cultures living peaceably side by side a failure. What, after all, is the alternative? Shall Germany officially declare itself a nation with room enough for one culture only? For the record, that’s been tried already. And it didn’t work so well, either.”

Got that. Been tried. Didn’t work. Which then raises the question: Why would an otherwise moderate woman adopt the views of the modern-day anti-immigrant populists? Why would she endorse a position that could be called relativist at best and racist at worst? Is it simply her Germanic gene, as the Miami Herald’s op-ed historians seem to suggest? The answer is simple — Angela Merkel is not the woman she is currently made out to be. It is time to consider what she really said and really meant. It is time to put her remarks into context.

A good place to start is the quote itself, the full quote, in a translation as colloquial as her speech: “We are a country that invited guest workers to come to Germany in the 1960s. Now they live among us. For a while we kidded ourselves. We said: They won’t stay, they’ll be gone at some point. But that is not the reality. And most certainly the approach failed to say: We’ll do a multi-kulti thing here; we’ll just live next to and detached from each other and declare how happy we are with each other – this approach has failed, utterly failed.” Germans are not known for their humor, but they do do irony and sarcasm. Both traits rarely convey in translation. But the video of the speech reveals that Merkel displayed utter sarcasm when she disparaged the “multi-kulti thing” as a hippie vision of peace, love, and brotherhood, as some sort of German adaptation of a multi-ethnic Haight Ashbury.

The German term “multi-kulti” is commonly translated to mean “multiculturalism.” But multiculturalism has two meanings. As a descriptive term, it simply refers to cultural diversity. As a normative term, it implies a positive endorsement, even celebration, of communal diversity, typically based on certain group rights and the absence of pressure or even incentives to assimilate. The German term “multi-kulti” only captures the second, normative meaning. That’s why “multi-kulti,” to Merkel, is a synonym for leftism and early Green utopianism. She thinks it has produced not-so-benign neglect and, as she has put it multiple times, will lead to “parallel societies” of immigrants that have no connection to German mainstream society. Not even the German language is spoken in the neighborhoods that she pictures when using this term.

Angela Merkel is a conservative. A “salad bowl” approach to integration is not hers — too hands off. She would not endorse a version of a melting pot in which cultures integrate with each other to create a new society. Her concept sees immigrants who integrate into a culturally dominant mainstream society. Her conservative party takes an aggressive, state-centered, and hands-on stance toward integration best summed up in six words: assimilate — take it or leave it! It is debatable whether this concept is appropriate for a multi-religious, multi-ethnic Europe, in which the free movement of people is the norm. But the end of cultural pluralism it is not, racism it is not. And that makes all the difference. In fact, in the very same speech, Merkel emphasized that “Islam is now a part of Germany.” She is preparing her party and her country for more, not less, immigration, and she is explicitly rejecting the views of the populists and the anti-islamic hatemongers.

The global economic crisis has propelled us into a (hopefully) brief period of de-globalization. Nationalism is on the rise, as are anti-free-trade and anti-immigrant sentiments. An anti-establishment mood is part of that package. Gert Wilders in the Netherlands, Thilo Sarrazin in Germany, Jimmie Akesson in Sweden, and large parts of the Tea Party movement in the United States are products of that wave.  It is dauntingly difficult to run a country in this environment. Especially now, we should be careful not to paint those who govern us into a corner where they don’t belong.

Thomas Kleine-Brockhoff is the Senior Director for Policy Programs at the German Marshall Fund.

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WASHINGTON — The effort to defend Europe’s single currency has changed the continent’s makeup overnight. First, the bailout of Greece, then the huge $1-trillion aid package that will be made available to Eurozone countries facing instability. A big step toward a more centralized, federalist Europe was taken. The path toward a fiscal union is particularly hard to sell in Germany; the memory of the hyperinflation of the 1920s is still powerful. Until now, German Chancellor Angela Merkel has defended her support of the aid package with the so-called “TINA” argument: “There Is No Alternative.” This negative rhetoric will not be enough to convince the population. Instead, Germans should be convinced by their leadership that the euro is existentially important for them. Here are 10 reasons why:

1. What strengthens Europe also strengthens Germany. A vital EU safeguards German interests, making an economically powerful Germany the European pivot. The creation of the European Union healed political wounds after World War II, allowed Germany to reconcile with its neighbors, and led to an unprecedented period of peace and security in Europe. All of Europe has benefited from this–and none more than the reunited Germany.
2. German interests are best protected by open markets, a stable political framework, and economic prosperity in Europe and beyond. This alone is the foundation on which German businesses leverage their excellent international competiveness.
3. The EU has advanced the opening of European markets, which have served as the foundation of German economic success. As a result, Germany and Europe have experienced an era of extraordinary success over the course of the last half-century.
4. The economic and monetary union is better than its reputation in Germany. It has helped Germany deal with the stresses of post-1989 reunification. An extended period of wage restraint, social peace, and an innovative entrepreneurial class that has invented new products and discovered new markets has contributed to this development. As a result, the reunited Germany has once again become globally competitive.  
5. If prices, wages, and, consequently, real buying power and living conditions converge within the EU, and a new middle class emerges in Eastern Europe, Germany will become the largest beneficiary of the European Union, allowing German businesses to enjoy the benefits of a domestic market of 500 million people. Indeed, since the advent of the industrial age, Germany has never had better marketing conditions.
6. The euro has not caused hidden inflation, contrary to what many Germans suspect. In fact, Europe’s single currency has led to a long phase of price stability. The euro has deprived member states of the option of reacting to the competitive advantages of German firms by devaluating their national currencies. Thus, the euro has been a catalyst for change and modernization, especially in the less competitive regions of Europe. More competitive countries, Germany among them, have to adjust less because they have already done so in the past. Therefore, Germany enjoys an export boom, not only within Europe, but globally. This has been a massive boost for employment in Germany.
7. New actors have stepped onto the world stage, including China, India, Russia, and Brazil. As a consequence, Europe’s position is weakening. On the other hand, due to its economic power and size, Germany has become Europe’s dominant economic power. With power, however, comes responsibility. The biggest beneficiary of a peaceful, stable, and prosperous Europe with a common economic space for 500 million people must also be an anchor and guarantor of the European integration process. That is true in good times and in bad.
8. The pursuit of a narrow national interest does not serve Germany well in its European role. Germany’s interest is best served when it looks out for all of Europe. To do so it must help to produce European “public goods.” Such goods include stability, solidarity, and the commitment to solve conflict through cooperation.
9. Germany must continue to lead Europe to a higher level of integration. After World War II, a goal of European policy was to integrate Germany into a larger structure in order to contain it. The creation of Europe meant the emergence of a system of continental checks and balances. During the current Great Recession, Europe suddenly longs for German leadership. That has not happened since the Napoleonic Wars. It is a reality of a transformed Europe that sees Germany as a partner and no longer as a threat. The benign side of Germany’s power is the discovery of the age of integration in Europe.   The political challenge of the day is to harness this power.  
10. Environmental and demographic challenges, cross-continental migration, and the financial market crises are examples of the same stark fact: national solutions are no longer sufficient to address global problems. If Europe wants to influence global decision-making, it can only do so on the basis of a closer union. Whoever allows for the economic disintegration of Europe destroys Europe’s status as a global power. Germany must play its part in Europe in order for Europe to play its part on the world stage.

Thomas Kleine-Brockhoff is a Senior Director for Policy Programs at the German Marshall Fund of the United States in Washington, DC. Thomas Straubhaar is the Director of the Hamburg World Economic Institute and a Fellow at the Transatlantic Academy in Washington, DC.

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