Too Smart for Europe

How Germany sees the Eurozone crisis. And why others demur

HAMBURG AND BERLIN ~ Rostock is a small town in Northern Germany, off the Baltic Sea Coast, with a population of nearly 200,000, down from 260,000 in 1989 after the Berlin Wall fell. From the balcony of every room in the multi-storey Hotel Neptun, where the German government arranged to put me up for a night, you can see the white sand beach of Warnemunde. Around Christmas isn’t the time you would see much activity on a beach off the icy Baltic Sea, apart from some well-clad joggers. The breeze is chilly. The average morning temperature in December hovers around 3º C. It hasn’t snowed yet, but it is almost freezing.

The advantage of watching a deserted coastline is that you begin to imagine things. Like a photo frame, you begin to fill the space that your eyes stare at with people and happenings. On the train from Hamburg to Rostock, business writer Dirk Böcher—my ‘tandem partner’ for the journalist exchange programme that I was part of—had spoken of the way people were killed trying to escape East Germany. Standing in the balcony, I imagine people trying to escape the coast, 30 years or so ago, on boats and rafts they had secretly built, and being shot at by Red soldiers in long overcoats.

Later in the day, before we leave Rostock for Berlin and walk through the city centre, those images acquire faces. At least some of them do. One such face is that of Walter Gerber of Lubek. Walter, a bearded man in his late 40s or early 50s, and his wife Ingrid are smiling in a picture that is part of a large poster. The entire room, which was once a cell in the secret prison here, is dedicated to Gerber’s effort to escape East Germany—in the 1980s—and get beyond the Iron Curtain by taking a route below the surface of the icy sea. The walls of the cell are adorned with pictures and diagrams of Projekt Delphin—Gerber’s ambitious attempt at using a 7-by-5 ft homemade submarine to escape to Gedser in Denmark, a two-hour ferry ride from Warnemunde port.

He was caught and kept here, a suffocating 8-by-10 ft cell with a wooden door bearing three locks and a little slit for food and other deliveries. Before he could be killed like hundreds of those who tried to escape the clutches of the Communist regime in the German Democratic Republic (GDR), the Wall fell and East and West Germany were reunited.

The hidden prison used by the secret services to hold their suspects without trial for months together is now part of the University of Rostock. It has been converted into a small museum where postgraduate students also attend lectures and study history and philosophy. From the outside, the prison looks like any ordinary red-brick building. Residents in the area never knew it existed till the GDR collapsed. At one point, in 1988, more than 7,000 secret service operatives kept watch on nearly 20,000 citizens suspected to be against the regime. “It was an environment of deep mistrust. Almost everyone looked at everyone else with suspicion,” Böcher says.

In another part of town, inside a similar looking building that houses Biocon Valley, Dr Heinrich Cuypers is at work on scientific projects involving research on longevity and distance health care. As senior project manager in the life science department of the lab, his work is at the core of what Biocon Valley set out to do in the mid 1990s: with government funding, reduce the economic gap between East and West Germany. Biocon Valley uses biotechnology to that end.

Rostock had a bustling local economy of shipbuilding and agriculture before the Berlin Wall fell. Since reunification, Berlin’s biggest challenge has been to address economic disparities, which means uplifting the East. “Since shipbuilding has been going down, tens of thousands of jobs have been lost,” Cuypers explains. So the government invested millions of euros to set up research centres here and create jobs in this East German town. “At the time of reunification, big companies from the West were happy to get a new market,” he adds, “We were able to convince the government that this field produces jobs which are permanent and not like call centre jobs.” With about 100 companies at work in the sector now, nearly 100,000 people have found jobs.

With public funding, there is a history of employees at Biocon mastering a research-to-application process for a particular product or technology and then venturing out on their own. “Then we have to start all over again, on another technology,” Cuypers smiles. But that is really the whole idea and he can afford to smile because Biocon Valley doesn’t envisage breaking away from government funding. It is one of the many ways in which the country is trying to elevate the East for a measure of parity with the West.

“Even after 21 years of spending, the East still lags behind,” says Dr Indo Malcher, chief editor at the German business monthly, Brandeins. He sees no easy way out of the Eurozone crisis either, the issue that dominates public debate not just in Germany but across the EU, of which the country is seen as the anchor. If addressing disparities within Germany is proving so difficult, he reasons, dealing with those in the wider Eurozone—with its constituents far less homogenous and cohesive—would be quite a long haul. “Greece is only 2 per cent of the European GDP and European leaders could have easily handled [its public debt crisis],” says Malcher.

There is an explanation for what happened, which inevitably includes stereotypes. One stereotype that Germans, especially, love goes: tax evasion is Greece’s national sport. According to another, the Greeks and Italians are on holiday without end, too lazy to work and always ready to live off the State (and overseas credit). Fiscally austere Germany, on the other hand, has been thrifty and hardworking, and wants to model the rest of the Eurozone in its own image. In 1998, it even deflated its economy, cut social benefits and went on a productivity drive (a decade-long wage freeze). Spain, Portugal and Italy, meanwhile, were raising wages without boosting output much.

The net result, in this narrative, was a ‘multi-speed Europe’: an extra-competitive Germany, an export hothouse, and several outlying EU states that could not keep up—but had access to cheap euro credit all the same. Add to this a bout of state overspending in these weaker economies, and the lack of a devaluation option (given the common currency) to reflect national weaknesses and help regain export competitiveness, and it was enough to overload them with debt and eventually strain the entire euro project. To fix things, German Chancellor Angela Merkel wants other Europeans to tighten belts and work harder.

Malcher, who blames “a lack of policy design in the EU” for the Eurozone’s gaps, prefers to point to Germany’s own role in the crisis. Its post-1991 export strategy was so aggressive that it paid little attention to anything else. “Greece and Italy were buying inflation from Germany,” he says, unhappy with the way Merkel wants to impose fiscal tabs on truant economies, “Greece and Portugal couldn’t compete, so our banks lent them money to keep buying our products.”

Ordinary Germans, though, are miffed about having to bear the burden of other Europeans, as they see it. And they insist on thrift. Greek or Italian attitudes towards spending and savings, to their mind, are unacceptable. In Germany, says Malcher, quoting his father’s example, you do not take a large loan and buy a house. You build a small house and expand it as your means grow.

The euro uncertainty has led people in Germany to start investing in property. Real estate saw 6 per cent growth in 2010-11 in Hamburg, as opposed to an average of 1 per cent for as long as he can remember. And Germans are set to work not just harder but longer. “The German government recently increased the retirement age to 67,” says Malcher, “If an average German is working 10 years more than the average Greek, there is no way Greece can catch up.”

Overlooking the possibility of a multi-speed Europe is something the EU treaty is widely blamed for. “And now we have 20 economies which are totally different,” says Malcher. What this has meant is an atmosphere of mutual suspicion within Europe—not unlike what life in Rostock was like in the 1980s. These suspicions are compounded by the domestic concerns of various leaders involved in negotiating a solution. Each has an electorate to deal with; precisely why a one-size-fits-all solution is fraught with risk, no matter how avidly Merkel hardsells the prospect of a strong euro, backed by fiscal firmness, emerging from the crisis.

Politically speaking, Merkel’s own concerns are somewhat different from French President Nicholas Sarkozy’s. Sharp differences arose in mid 2011, when it came to a rescue package for Greece, which was about to default on its public debt. French private banks were big holders of Greek bonds, and the haircut imposed on them by the EU—on Merkel’s insistence—was accepted only reluctantly by Sarkozy. In exchange, Merkel had to withdraw her resistance to giving new powers to a Eurozone bailout fund to directly buy bonds of weaker countries and thus keep the rates at which they borrow money from the market from soaring too high. The Dutch, on their part, wanted a bigger bailout for Greece if private bondholders were to bear such a big burden, while the Finns had their own proposals.

And that was just the start. The EU’s Brussels summit in early December witnessed even more dramatic moments. While almost all EU members agreed to Merkel’s plan of reducing debt and fiscal deficit levels to pre-set limits (with fines for non-compliance), Britain stood aloof. In fact, British Prime Minister David Cameron vetoed all attempts to change any EU agreement, leaving the rest to sign inter-country deals to achieve their aim. Back home, defending his decision, Cameron told British Parliament: “The EU treaty is the treaty of those outside the euro as much those inside the euro. Creating a new Eurozone treaty within the existing treaty without proper safeguards would have changed the EU for us too.” Germany is angry with the UK’s stance. The country, it grumbles, wants to “sit on the fence” and yet interfere with EU efforts to resolve the crisis.

The annoyance clearly shows when I meet Rupert Polenz, member of the Bundestag (Germany’s lower house) and Chairman of the Committee on Foreign Affairs. Polenz is late for the appointment by over 15 minutes. Over the past few days dotted with appointments, I have learnt that is unacceptable even for top leaders. So Polenz starts the meeting with a series of apologies, explaining how he was held back in the Bundestag next door because the house is in session. But his politeness vanishes when he speaks of Cameron’s or even US President Barack Obama’s allegation that EU leaders are not doing enough. “London knows we have to do it together, but they want to have their cake and eat it too,” he says. He suggests that Anglo-American resistance will only make the EU stronger. “The last summit has a clear message: that even if we haven’t yet found everything we need to solve the crisis, we are committed first to solve it, and second, we are staying together to solve it.”

Polenz adds, “The basic data is simple, the US economy is one-fourth the world’s economy, the EU is another quarter, and the other half is the rest of the world. The euro is thus backed by the economy of a quarter of the world… linkages between the economies of Europe, US, India and China are so dense that if one part were to die, it’ll have a huge effect on others. Common sense lies in cooperation.”

But for politicians, common sense also includes retaining power. Experts suggest that a European monetary fund buying debt and funding infrastructure and education in Southern Europe would have worked better than tighter fiscal control that Merkel has insisted on. “While there is need for acute firefighting… [the EU] is not yet an economic and currency union. It is not anywhere close to a fiscal union. The system is under stress; there needs to be an immediate response in the short term, and while the troubleshooting is on, it needs to be reformed,” says Almut Möller, a euro expert and head of programme at the Berlin-based thinktank DGAP that advises the government on foreign policy.

The EU, she says, will inevitably have to work towards greater integration out of “sheer necessity” and while there is no choice, heads of different states “might not be able to do it, locally”.

There are several old walls that EU members must tear down before they can reach the next stage of integration, or perhaps even the next level of reforms. Without that, the euro experiment could end up as a museum story, like Gerber’s Delphin submarine.

European UnionEurozone crisisGermany