The crisis now engulfing heavily indebted European governments has exposed deep rifts within the European Union, and especially among the 16 countries that use the euro as a common currency. Last week worries about Greece's solvency threatened to infect Spain, a much bigger economy caught in a downward spiral of 20 percent unemployment, continued recession, and a budget deficit that's soared past 12 percent of GDP. Portugal, Ireland, and Italy look little better. Richer EU members, such as France and Germany, reject any direct bailouts of their troubled neighbors. Uncertainty and fear of contagion have shaved 10 percent off the euro's value against the dollar—hardly a rock of stability these days, given America's own soaring debt—in just three months.
Because it could ultimately undermine the stability of the EU itself, the crisis cries out for serious leadership. The Brussels bureaucrats are of no help; so far the new leadership posts created by the Lisbon Treaty, the quasi constitution the EU finally adopted last year, have failed to fulfill their promise of giving Europe fresh focus and direction. Instead the weak new posts have spawned turf battles between Commission president José Manuel Barroso and the new EU president, Herman Van Rompuy, perpetuating Europe's leadership vacuum. It's clear that only a powerful national leader capable of crafting consensus abroad can take on this much-needed role.
At this crucial moment, all eyes are on German Chancellor Angela Merkel, the most widely respected of Europe's leaders. Not only does she head Europe's biggest and richest economy, whose standing has been enhanced by getting through the downturn without a significant dent in employment (so far), and with the lowest public deficit of any major Western country; Merkel, in her unruffled, no-nonsense style, has shown in the past that she is an expert at navigating rivalries and hammering out consensus. In this, no other leader comes close: not the unpredictable, hyperactive French President Nicolas Sarkozy, nor the effectively lame-duck British Prime Minister Gordon Brown, nor Spanish Prime Minister José Luis Rodríguez Zapatero, deeply absorbed with his own country's crisis. Most important, the German economic juggernaut has benefited like no other from EU trade and the single currency. Berlin therefore has a vital interest that the bloc remain intact, stable, and prosperous.
The problem is that neither Merkel nor her country is in much of a mood to lead. Over the two decades since its reunification, Germany has turned into a sated and inward-looking power concerned more than anything with preserving the status quo. Merkel has become Germany's most popular leader since World War II by promising Germans continuity, and won reelection in September 2009 on a platform of avoiding change and reform. Now, however, the crisis over Greece is just one of a growing number of threats to Germany's status quo that pit its no-experiments mantra against the urgent necessity for an outward-looking, proactive response.
At first glance, Merkel has every reason not to get involved. In the past, calls for German EU leadership have invariably been code for getting the Germans to pay—as they did willingly under past chancellors such as Helmut Kohl, who helped unite Europe with his vision and checkbook. But for leaders of Merkel's generation, European unification is no longer a matter of war and peace, a moral imperative grown out of the deadly conflicts of the 20th century, as it was for Kohl. Why should Germans pay for Greeks (or Spaniards, or Portuguese) living it up on a mountain of public and private debt, while Germans have gone through a decade of painful reforms, tax hikes, and stagnating wages? It seems only natural, especially given Greece's long record of corruption and lying about its budget and deficit numbers, to leave the Greeks to their well-deserved fate: a possible default.
Yet Germany is much too entangled not to step in. For one, hypercompetitive German companies have profited more than others from the stability of the common currency, which has vastly expanded trade in the EU. Second, Germany is dependent on its euro-zone neighbors for 44 percent of its exports, worth 15 percent of German GDP (as well as much of its economic growth, which comes almost exclusively from exports). Third, Germany's banks and insurance companies have been reckless buyers of high-yielding bonds from unstable countries. It turns out that the same German banks that became the world's biggest buyers of U.S. toxic securities —above all, the dysfunctional, state-controlled Landesbanken—also plowed €348 billion of Germany's nest egg (the savings surplus that is supposed to build wealth for the country's aging population) into the bonds of shaky Southern economies. So much for the option of leaving Greece and its ilk to their fate.
Indeed, Merkel has tiptoed toward taking action in the Greek imbroglio. She has joined Sarkozy in vague declarations of solidarity with Greece while demanding a tough austerity budget from Athens. Behind the scenes, there is talk of a possible guarantee by Berlin for German banks that buy Greek bonds—a convenient way for Merkel to keep her promise to German voters that there will be no cash bailouts.
Greece's budget is now all but ad-ministered from Brussels, with Greece required to report progress on spending cuts and tax hikes once a month. Even though on Friday Merkel once again ruled out direct financial aid to Greece, her involvement seems to have calmed markets. But several key issues remain unresolved, including the need for a much better mechanism for EU-wide economic coordination than the ineffective Stability and Growth Pact, which sets widely flouted limits on inflation and deficits. Even more fundamental is the almost China-like dependence of Germany on exports to generate growth while its domestic economy has stagnated for decades, creating huge trade and financial imbalances within the euro zone.
Beyond Greece and Spain there lurk many other crises that will test Germans' illusions that the status quo can be preserved without fundamental change at home or more engagement abroad. Most obviously, in Germany itself, it's not clear how Merkel can keep her implicit promise of avoiding significant reform of the country's cherished welfare state, which already eats up more than a third of German GDP.
According to the McKinsey consultancy, Germany will need annual growth of 3 percent—almost double the pre-crisis average—just to maintain its prosperity in the face of an aging and shrinking workforce. That will take much more reform than the feeble start under Merkel's predecessor, Gerhard Schröder. So far, Merkel has partially reversed many of Schröder's unpopular labor-market and welfare reforms in order to secure her popularity; now the crisis has made pro-market economic reform even more of a dirty word. But the economic and demographic facts—including a shrinking workforce, an aging population, and a stagnating domestic economy—won't go away.
At home, avoiding change amounts to assured decline. An unreformed, weak economy also means Germany cannot be the locomotive to pull the rest of the continent back to health.
Abroad, it's not as if Merkel isn't assertive of German interests. But instead of translating these into a more proactive, globally oriented foreign policy, she has kept post-unification Germany on its largely isolationist track by abstaining from any international leadership role (with a few exceptions such as climate policy, where she pushed through EU-wide emissions reductions, and the security guarantee she has given to Israel). This is best illustrated by Germany's continued aversion not only to deploy military force abroad, but even to take any serious lead in civilian operations. Though she has dutifully kept Germany engaged in Afghanistan, the Bundeswehr's 5,350 soldiers play only a limited fighting role, and it wasn't until September 2009 that Merkel even addressed the Bundestag on the war. That goes hand in hand with a stunning absence of strategic discourse among Germany's political and media elites, a result of a reflexive postwar pacifism that has long left the nasty business of war and conflict to others.
This leave-us-out attitude, grown out of Germany's post-Holocaust attempts at moral hygiene, is in a constant clash with global reality and growing demands for Germany to get involved. It's also in strange contrast to the country's aspirations to gain a permanent seat on the Security Council of the United Nations.
Germany as a trading economy and champion exporter has benefited more than any country outside China from a global order ultimately backed by the United States, yet has scrupulously avoided any debate over its role in, and contribution to, the post–Pax Americana world—one in which an America with fewer resources may no longer support the Cold War–era bargain in which Europe outsourced its security to the United States. Germany has all but blocked NATO reforms aimed to bring the alliance into the 21st century, and has made few visible contributions to a common EU foreign and security policy. Instead, according to a confidential memo leaked last month, Germany's big worry about the new EU diplomatic service created under the Lisbon Treaty seems to be that too many of the jobs are going to British diplomats.
The latest sign that Germany is avoiding this debate is the pet project of the new foreign minister, Guido Westerwelle, to remove all remaining U.S. nuclear warheads from German soil so that Germany can be a leader in "peace and disarmament"—a policy seemingly straight out of the 1980s that has little to do with 21st-century threats to Europe's security coming from Iran or Pakistan. The same lack of strategic debate concerns the future membership of Turkey in the EU, widely seen to be a prerequisite if the EU is to become a global security player. But such arguments haven't had a chance against ethnic and religious concerns in Germany, as in most other European countries. Here, too, it will be a question of leadership if widespread popular misgivings are to be overcome, just as it took decisive leadership to take earlier strategic steps in Europe's development, from introducing the euro to eastward expansion of the EU.
Until now, there have been very good reasons for Germany's leaders to abstain from leadership, given the constraints they face at home and abroad. In Europe, any attempt by Germany to press forward, whether alone or in concert with traditional partners such as France, can quickly meet opposition by other EU members who view such efforts as bullying.
At home, Merkel faces even more opposition, with so much veto power built into Germany's uniquely gridlocked political system that it's a surprise she gets anything done at all. A deeply conservative electorate fearful of losing the status quo seems to reward leaders who share its aversion to change and foreign entanglements.
Yet there are tenuous signs of a shifting zeitgeist that could make it easier for Merkel to exercise power. Germans have never been happier to identify themselves with their country, according to Allensbach Institute pollster Thomas Petersen. That could be a basis for a more relaxed attitude toward leadership and power, to which Germans have been so allergic in the past, when any mention of leadership—Führung—set off horrible memories of an earlier führer.
Last fall a Bundeswehr-ordered bombing raid that killed 142 Afghans, many of them civilians, set off an unprecedented debate over the use of military power. As unpopular as the Afghanistan mission remains, support for the Bundeswehr in opinion polls keeps inching up, not down. Slowly, Germans are in the process of reembracing the vocabulary they once thought unsuitable for themselves, such as power, security, and geopolitics, says Jan Techau, a NATO Defense College fellow in Rome.
In the past it has been smart (and very profitable) for Germany to do what it does. For a highly networked, super-globalized economy at the crossroads of Eurasia with a nasty history, it hasn't been a bad strategy at all to speak softly and carry no stick. Ranked the world's seventh-most-competitive economy by the Geneva-based World Economic Forum, Germany has all the potential to do extremely well in the 21st century. That's the theory. In practice, that future can't be had without change—which in Germany's case will require the vision to overcome powerful political and cultural forces fixated more than in most other countries on the status quo at home and abroad. Frau Europa, it's time to lead.